Zafgen Inc
Annual Report 2017

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Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2017or ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 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, 4th 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 ☒Indicate 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 ☒Indicate 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 thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days. Yes ☒ 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 submittedand posted pursuant 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 tosubmit and post such files). Yes ☒ 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 ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☒Non-accelerated filer ☐ (Do not check if a smaller reporting company) Emerging growth company ☒Smaller reporting company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revisedfinancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The 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 30,2017, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $64.9 million (based on the last reported sale price on theNasdaq Global Market as of such date). As of March 1, 2018, there were 27,558,883 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, 2017. Portions ofsuch definitive proxy 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, 2017 PAGE PART I Item 1. Business 4 Item 1A. Risk Factors 30 Item 1B. Unresolved Staff Comments 61 Item 2. Properties 61 Item 3. Legal Proceedings 62 Item 4. Mine Safety Disclosures 62 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 63 Item 6. Selected Financial Data 65 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 66 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 83 Item 8. Financial Statements and Supplementary Data 84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 110 Item 9A. Controls and Procedures 110 Item 9B. Other Information 110 PART III Item 10. Directors, Executive Officers and Corporate Governance 111 Item 11. Executive Compensation 111 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 111 Item 13. Certain Relationships and Related Transactions, and Director Independence 111 Item 14. Principal Accounting Fees and Services 111 PART IV Item 15. Exhibits, Financial Statement Schedules 112 Item 16. Form 10-K Summary 112 SIGNATURES 116 Table of ContentsPART IThis Annual Report on Form 10-K, or Annual Report, contains forward-looking statements that involve risks and uncertainties. We make suchforward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securitieslaws. All statements other than statements of historical facts contained in this Annual Report are forward-looking statements. In some cases, you canidentify forward-looking statements 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 statementsinclude, but are not limited to, statements about: • the accuracy of our estimates regarding expenses, future revenues, cash forecasts and capital requirements; • our plans to commercialize ZGN-1061 as a treatment for metabolic diseases including type 2 diabetes and obesity, either alone or through astrategic partner; • our ability to successfully complete the Phase 2 clinical trial of ZGN-1061, and successfully advance ZGN-1061 into later-stage clinicaltrials, including in the United States through the filing on an Investigational New Drug, or IND, application; • our ability to successfully file and have our IND application for ZGN-1258 go into effect and to successfully advance ZGN-1258 intoclinical trials; • our ability to dissociate effects of methionine aminopeptidase 2, or MetAP2, inhibitors from pro-thrombotic effects or other adverse eventsobserved in clinical development of our first-generation compound, beloranib; • our ability to distinguish ZGN-1061 and other novel MetAP2 inhibitors relative to our first-generation compound; • regulatory and political developments in the United States and foreign countries; • the performance of our third-party contract 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 our product candidates and our ability to serve those markets; • the rate and degree of market acceptance of our 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 financialperformance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements tobe materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors thatmay cause actual results to differ materially from current expectations include, among other things, those listed under Part I, Item 1A. Risk Factors andelsewhere in this Annual Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except asrequired by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomesavailable in the future. 3 Table of ContentsThis Annual Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certaindiseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information thatis based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events orcircumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained thisindustry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other thirdparties, 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 both rare andprevalent metabolic diseases including type 2 diabetes, Prader-Willi syndrome, or PWS, and potentially other metabolically related disorders. We havepioneered the study of methionine aminopeptidase 2, or MetAP2, inhibitors and are focused on developing novel therapeutics that treat biologicalmechanisms that underlie metabolic disorders through the MetAP2 pathway.Our lead product candidate is ZGN-1061, a novel fumagillin-class MetAP2 inhibitor administered by subcutaneous injection, which is currentlybeing profiled for its utility in the treatment of type 2 diabetes. Type 2 diabetes is a prevalent, chronic, progressive, multifactorial disorder that leads toincreased microvascular and macrovascular disease, and as such increases risk of death from cardiovascular disease, stroke, and kidney failure. Type 2diabetes is also a leading cause of amputation and blindness. Existing agents, while effective in reducing blood glucose levels, fail to reduceprogression of the disease, which is driven by loss of function of insulin-producing beta cells and by loss of sensitivity to insulin action. New therapiesare needed to improve glycemic control and reduce comorbidities of type 2 diabetes.We completed a Phase 1 clinical trial of ZGN-1061 in the Netherlands, which demonstrated rapid drug absorption and clearance in line withpre-specified criteria established for the molecule. In addition, ZGN-1061 was well-tolerated, with no evidence of pro-thrombotic effects or other safetysignals. We are currently conducting a Phase 2 clinical trial in Australia and New Zealand of ZGN-1061, which is designed to evaluate safety,tolerability, and glucose-lowering efficacy in patients with type 2 diabetes otherwise poorly controlled with non-insulin agents.We reported results of an interim analysis of this clinical trial on March 6, 2018, expect to report full results of the core part of this clinical trialmid-year 2018, and the results of the entire trial including the additional arm recently added to the trial early in 2019.We also have initiated development of a second, highly-optimized MetAP2 development candidate, ZGN-1258, administered by subcutaneousinjection. We expect that our initial indication for ZGN-1258 will be PWS. PWS is a rare and complex genetic disorder characterized by physiologic,cognitive and behavioral symptoms including hyperphagia, uncontrollable hunger and its related behaviors, and obesity. Published population studiesestimate 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. The physiological drive toeat 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 or unpalatableto others. Unsupervised patients will often eat to the point that it causes serious physical harm or death. As a result, caregivers are often forced to placelocks and alarms on refrigerators and pantries that contain food. Despite attempts to control the access to food, the typical adult patient with PWS ismorbidly obese and, based on evaluation of published survival data, has an average life expectancy of 32 years of age. Unfortunately, neither dietaryintervention 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, aspatients with PWS often overeat to a point whereby they can rupture their stomachs, which is frequently a cause of death. 4 Table of ContentsWe initiated Investigational New Drug, or IND, application enabling nonclinical activities in the first quarter of 2018, in preparation for filing anIND with the U.S. Food and Drug Administration, or FDA, and plan to begin Phase 1 clinical development by the end of 2018. We anticipate our Phase1 clinical trial of ZGN-1258 will be focused on evaluation of drug exposure, safety and tolerability following single doses in normal weight andotherwise healthy subjects, and understanding the dose-responsiveness of changes following repeat dosing for circulating biomarkers of drug effect,body weight change, and changes in hunger-related parameters in obese but otherwise healthy subjects. Providing the results of this clinical trial aresupportive of further development, subsequent clinical trials are anticipated to evaluate the effects of treatment with ZGN-1258 on core therapeuticendpoints in PWS such as improvement of hyperphagia-related behaviors and/or obesity. We expect to conduct a multinational PWS natural historystudy, which we plan to begin in mid-year 2018. The study will inform our development program and provide important insights into the medical andclinical history of people with PWS.Both ZGN-1061 and ZGN-1258 were discovered by our researchers as part of a multi-year campaign to identify highly potent and effective novelcompounds with nonclinical safety profiles supportive of continued development. One core element of focus for optimization was to reduce oreliminate the potential for pro-thrombotic effects, a limiting factor that led to termination of development of our first-generation compound. To date,both new compounds have similar intrinsic potency against the MetAP2 pathway and display appropriate activity in animal models of type 2 diabetesand obesity. Both compounds display improved safety profiles relative to beloranib for effects on thrombosis.ZGN-1061 and ZGN-1258 are differentiated with respect to their tissue distribution and predominant sites of action in animal models. Whiletreatment with both compounds leads to target engagement and MetAP2 inhibition in key organs of relevance to the treatment of type 2 diabetes andobesity, ZGN-1258 also displays enhanced uptake into the brain and displays greater potency and activity in animal models of hyperphagic behaviorsthan does ZGN-1061. These differences support the use of ZGN-1061 in the treatment of type 2 diabetes, in which metabolic effects related to liver,adipose tissue, and muscle effects are likely to be important, and ZGN-1258 in higher need indications such as PWS, in which brain activity is likely tobe more important for therapeutic effects.Populations of InterestType 2 DiabetesAccording to the International Diabetes Federation, in 2017, 425 million people worldwide were living with type 2 diabetes and that number isprojected to increase to 693 million by 2045. In the United States alone, the Center for Disease Control estimated that there were 23 million peopleliving with diabetes and an estimated 84 million people who were pre-diabetic in 2015. Standard therapies for type 2 diabetes include physicianrecommended diet and exercise, oral hypoglycemic drugs such as biguanides (metformin), through to a number of insulin options. Metformin is mostoften the first line pharmacotherapy for the treatment of type 2 diabetes primarily due to the extensive experience, low cost and favorable benefit riskassociated with it. While metformin is likely to remain the initial choice for the treatment of type 2 diabetes, patients then often progress to additionaltreatment with oral anti-diabetes medications, such as sulfonylureas, DPP4 inhibitors or SGLT2 inhibitors as second line agents; injectabletherapeutics, such as GLP-1 receptor agonists and insulin are often added as third/fourth line agents, along with various combination products. Weexpect that ZGN-1061, if approved, will compete within the type 2 diabetes injectable space with third line agents. It is estimated that 40-45% ofpatients progress to needing insulin (estimated to be a $15 billion market) and that therapeutics have attained an 80% penetration rate into thediagnosed group of patients. The objective of each is to maintain a daily blood glucose level range recommended by a physician, and to reach atherapeutic target of 7%, which is the U.S. goal (6.5% in Europe) glycated hemoglobin A1C, or A1C. Each of the current therapies alone has itslimitations including numerous side effects. These side effects and the availability of a high number of treatment options, combined with the difficultyin daily management of glucose levels despite these treatments, creates a number of opportunities for a new third line agent to positively impact unmetmedical need. 5 Table of ContentsWe believe the diabetes drug market is estimated to be $35 billion and is on pace to grow to more than $71 billion by 2024. Pharmaceuticalcompanies have been investigating new approaches to treating diabetes and market value has been maintained in the industry due to the introductionof these new products. We believe that ZGN-1061 MetAP2 inhibition serves the purpose of re-establishing balance to the ways the body stores andmetabolizes 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. In the setting of type 2 diabetes, these processes lead to improvement of glycemic control.The following table summarizes the current pharmacological treatments for the treatment of type 2 diabetes: Treatment A1CReduction Key Advantages Product LimitationsFirst line biguanide (metformin) 1-1.5% Inexpensive, weight loss (up to ~3 kg frombaseline), extensive experience Gastrointestinal effects, lactic acidosis,vitamin B-12 deficiencySecond line sulfonylurea (glimepiride, glipizide,glyburide) 1-1.5% Inexpensive, extensive experience Hypoglycemia and weight gainGLP-1 Receptor Agonists (albiglutide,dulaglutide, exenatide, liraglutide,lixisenatide, semaglutide) 1-1.6% Weight loss (up to ~ 3.5 kg from baseline), rarehypoglycemia, improvement in cardiovascularrisk factors, improvement in cardiovascularmortality (liraglutide), improved postprandialglucose excursions Injection administration, gastrointestinaleffects, risk of thyroid c-cell tumorsDPP4 Inhibitors (alogliptin,linagliptin, saxagliptin, sitagliptin) 0.5-1% Rare hypoglycemia, well tolerated Immune-mediated dermatological effectsSGLT2 Inhibitors (canagliflozin,dapagliflozin, empagliflozin,ertugliflozin) 0.5-1.5% Weight loss (up to ~3 kg from baseline), rarehypoglycemia, improvement in cardiovascularrisk factors, improvement in cardiovascularmortality (empagliflozin) Genitourinary infections, hypotension,increase in low density lipoproteins, diabeticketoacidosisthiazolidinediones (pioglitazone,rosiglitazone) 1-1.5% Rare hypoglycemia, improvement intriglycerides and cardiovascular events Weight gain, edema/heart failure, bonefractureInsulins (under some circumstances may be first or second line)Regular and Rapid-acting Insulins(aspart, glulisine, lispro, inhaledinsulin, Humulin R, Novolin R) Varied Established standard of care and directlyaddresses insulin insufficiency Largely injection administration,hypoglycemia, weight gainIntermediate-acting Insulins (HumulinN, Novolin N) Varied Established standard of care and directlyaddresses insulin insufficiency Injection administration, hypoglycemia,weight gainLonger-acting Insulins (NPH, glargine,detemir, degludec) Varied Established standard of care and directlyaddresses insulin insufficiency Injection administration, hypoglycemia,weight gain 6 Table of ContentsAvailable combination products include: biguanide/sulfonylurea, biguanide/meglitinide, biguanide/thazolidinedione, biguanide/DPP4 inhibitor,biguanide/SGLT2 inhibitor, SGLT2 inhibitor/DPP4 inhibitor, long acting insulin/GLP-1 receptor agonistNot included in ADA Primary Treatment Algorithm but may be used under specific circumstancesMeglitinides (nateglinide, repaglinide) 0.5-1% Improved postprandial glucose excursions Hypoglycemia, increased weightAlpha-glucosidase inhibitors(acarbose, miglitol) 0.25-1% Rare hypoglycemia, improved postprandialglucose excursions, nonsystemic Modest efficacy, gastrointestinal sideeffectsDopamine-2 agonist (bromocriptine) 0.5% Rare hypoglycemia, improvement incardiovascular events Modest efficacy, dizziness/syncope,hypotension, nausea, fatigue, somnolenceAmylin mimetics (pramlintide) 0.25-0.5% Weight loss (up to ~2.5 kg from baseline), improved postprandial excursion Injection administration, modest efficacy,gastrointestinal side effects, hypoglycemiaunder some conditions, for use withmealtime insulin onlyBile acid sequestrant (colesevelam) 0.5% Rare hypoglycemia, decreased low density lipoproteins Modest efficacy, constipation, druginteraction, increased triglyceridesDetails derived from the American Diabetes Association, or ADA, Standards of Medical Care in Diabetes-2017: Pharmacologic Approaches to DiabetesTreatment, Diabetes Care 2017;40(Suppl. 1): S64–S74 with supplementary information from The Medical Letter on Drugs and Therapeutics: Drugs forType 2 Diabetes, January 2017. A1C reduction estimates reflect changes following long-term therapy and are taken from the package inserts.PWSPWS is the most common known genetic cause of life-threatening obesity. PWS is a rare and complex non-inherited genetic disorder, whichresults from abnormalities of the fifteenth chromosome. Symptoms associated with PWS are believed to result, in part, from a defect in thehypothalamus, an important supervisory center in the brain that controls many important bodily functions, such as hunger, metabolism of fats andcarbohydrates, regulation of the sleep-wake cycle 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 ofpatients with PWS suffer from hyperphagia and obesity. Patients with PWS are constantly preoccupied with food and an unrelenting and overridingphysiological drive to eat. Hyperphagia, a leading symptom of PWS, has a significant negative impact on the patients’ quality of life and drivesobesity and a range of associated co-morbidities. Normal satiety, or the feeling of fullness after eating, does not exist in a person with PWS. Thephysiological drive to eat is so powerful and overwhelming that most patients with PWS will go to great lengths to eat large quantities of food, even ifit is spoiled, indigestible, or unpalatable to others. Furthermore, patients with PWS have a reduced propensity for nausea and vomiting. In addition toobesity, a variety of other symptoms can be associated with PWS, including cognitive challenges, intellectual disabilities, growth hormonedeficiency/short stature, low sensitivity to pain, hypersomnolence, or excessive sleepiness, and infertility due to hypogonadism, or insufficientproduction of sex hormones.Hyperphagia impairs a patient with PWS’s ability to live independently, requiring costly and constant supervision to prevent overeating.Without supervision, patients with PWS are likely to die prematurely as a 7 Table of Contentsresult of choking, stomach rupture or tissue necrosis, or from complications caused by morbid obesity, 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 from pulmonary embolism than the general population.Based on our evaluation of published survival data, the average life expectancy of patients with PWS is approximately 32 years of age. While a smallnumber of patients with PWS are cared for in costly group homes, the majority of patients with PWS live in environments where caregivers often placelocks and alarms on cabinets and refrigerators that contain food to impede a PWS patient’s efforts to obtain food at all times. We estimate the typicalannual cost of treating a patient with PWS is $100,000 to $200,000, excluding the often significant costs of drug therapies related to other medical andpsychological conditions, and the costs of any lost time from work experienced by their families due to responsibilities related to the care of a patientwith 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 in50,000. PWS is 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 uniqueattributes, the vast majority of patients affected by PWS are therefore diagnosed. We believe that approximately 40-50% of patients with PWS are 12years of age or older.Although there are pharmacological treatments for various symptoms of PWS, such as replacement of human growth hormone in patients withPWS that are deficient in growth hormone, based on our discussions with physicians who treat patients with PWS, there are currently no effectivepharmacological treatments for obesity and hyperphagia in PWS. Furthermore, bariatric surgery is contraindicated in patients with PWS due to pooroutcomes related to an increased risk of rupture of the reduced stomach in the setting of sleeve gastrectomy or gastric bypass procedures, or rupture ofthe restricted esophagus in the setting of gastric banding procedures with the consequence of life-threatening gastric perforation. Apart from restrictedaccess to food and constant supervision to prevent both life-threatening overeating and morbid obesity, there is currently no treatment for obesity andhyperphagia in patients with PWS.Our StrategyOur strategy is to significantly improve the health and well-being of patients affected by both prevalent metabolic and rare diseases includingtype 2 diabetes, PWS and potentially other metabolically related disorders. Key elements of our strategy include: • Advance the clinical development of MetAP2 inhibitors for the treatment of type 2 diabetes. We believe the patient population of type 2diabetes would benefit from MetAP2 inhibitor treatment through concomitant improvements in glycemic control, plasma lipid fractions,and body weight. These benefits were noted in our Phase 2b clinical trial ZAF-203, which studied our first-generation compound inpatients with type 2 diabetes. • Advance the clinical development of ZGN-1258 in rare conditions in which profound hyperphagia and obesity are central morbiditiesassociated with underlying genetic conditions. We believe that rare conditions such as PWS afford us an opportunity to efficiently developand commercialize ZGN-1258. We believe ZGN-1258 is well-suited for patients with hyperphagia and obesity that is caused by the failureof hypothalamic food intake control mechanisms, in particular the control of insatiable life-threatening hunger and hunger-relatedbehavior. In January 2018, we announced our advancement of ZGN-1258 into development for this rare disease indication and in the firstquarter of 2018 have begun work in preparation of filing an IND application for ZGN-1258 to begin Phase 1 clinical development by theend of 2018. • Leverage the knowledge of our experienced team of drug developers that have deep expertise in the function of MetAP2 inhibitors andmetabolic diseases. Our management team has deep expertise in 8 Table of Contents type 2 diabetes, PWS, obesity and related metabolic diseases, the function of MetAP2 inhibitors, the strengths and weaknesses of currenttreatments for type 2 diabetes and obesity and the ability to recognize the potential of novel therapies for the treatment of type 2 diabetesand obesity. Our team is complemented by highly experienced external consultants and collaborators in the areas of drug discovery,development and regulatory approval. Based on our experience in MetAP2 inhibitor development, we are exploring new chemicalapproaches to identify new molecules targeting the liver for treatment of metabolic liver diseases such as non-alcoholic steatohepatitis. • Maintain flexibility in commercializing and maximizing the value of our research programs. While we intend to develop ZGN-1061 forindications such as type 2 diabetes and other metabolically related disorders, we may enter into strategic relationships with biotechnologyor pharmaceutical companies to realize the full value of ZGN-1061. We intend to develop and commercialize ZGN-1258 in the UnitedStates and other major market countries for PWS.About ZGN-1061ZGN-1061 was discovered by our researchers as part of a multi-year campaign to identify novel compounds that avoided limiting nonclinicalsafety concerns observed with our first-generation compound. The compound has similar potency, and range of desired pharmacological activities inanimal models as other MetAP2 inhibitors, including beloranib. ZGN-1061 displays broadly improved safety margins in nonclinical studies,supporting the value of the compound as a more highly optimized drug product candidate.ZGN-1061 acts through potent inhibition 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 and growth factor mediators, thereby reducing the tone ofsignals that drive lipid synthesis by the liver and fat storage throughout the body. In this manner, MetAP2 inhibition serves the purpose ofre-establishing balance to the ways the body stores and metabolizes fat and glucose. MetAP2 inhibitors reduce the production of new fatty acidmolecules by the liver and help convert stored fats into useful energy, while stimulating use of glucose and fats as an energy source. In the setting oftype 2 diabetes, these processes lead to improvement of glycemic control.During nonclinical development of ZGN-1061, we conducted research to understand the imbalance of thrombotic events observed in the courseof beloranib clinical development. This research identified biomarkers associated with activation of blood clotting that subsequently were confirmedto be impacted in the setting of beloranib treatment in animals and cultured human endothelial cells. Further, beloranib was found to be tightly cell-associated in cultured endothelial cells, an effect that is related to the nature of the side chain of the compound. Modifying the side chain, as was donewith ZGN-1061, leads to altered endothelial cell residence time and greatly reduces the ability of the compounds to impact endothelial cell replicationand the display of pro-and anti-coagulant factors, particularly following short-term exposure. Before committing ZGN-1061 to clinical development,the compound was evaluated for its potential to augment blood clotting in these same models and was found to be inactive with respect to thrombosisat doses leading to exposures over 100 times the anticipated clinical exposure.About ZGN-1258ZGN-1258 was also discovered by our researchers as part of a multi-year campaign to identify novel compounds that avoided limitingnonclinical safety concerns observed with our first-generation compound. The compound has similar potency, and range of desired pharmacologicalactivities in animal models as other MetAP2 inhibitors, including beloranib. ZGN-1258 displays broadly improved safety margins in nonclinicalstudies, supporting the value of the compound as a more highly optimized drug product candidate.ZGN-1258 acts through potent inhibition of MetAP2. Like other MetAP2 inhibitors, ZGN-1258 modulates the activity of key cellular processesthat control metabolism and impact lipid synthesis and storage throughout 9 Table of Contentsthe body and leads to increased use of stored fats as an energy source. ZGN-1258 displays enhanced uptake into the brain and displays greater potencyand activity in animal models of hyperphagic behaviors relative to other MetAP2 inhibitors, including ZGN-1061. These differences support the use ofZGN-1258 in higher need indications such as PWS, in which brain activity is likely to be more important for therapeutic effect. Treatment of obese andhyperphagic animals with ZGN-1258 leads to reduction in both pathologic food intake and rapid body weight loss, making it of interest in thetreatment of severe forms of human obesity.Mechanism of ActionFirst-generation MetAP2 inhibitors, such as beloranib, were evaluated for their potential for treating obesity following publication of studies inthe Proceedings of the National Academy of Sciences in 2002 showing anti-obesity efficacy in animals treated with a prototype MetAP2 inhibitor.These studies showed that MetAP2 inhibitor treatment was associated with loss of fat tissue accompanied by an increase in fat oxidation, indicating aredirection of fuel usage toward utilization of stored fats as a source of energy. Reduced food intake also was observed in treated animals, suggestingeither direct effects of the agent on central feeding regulation or activation of a feedback loop linking the release and oxidation of stored fat toappetite.The MetAP2 inhibitor fumagillin was shown in 2004 to induce a novel protein-protein interaction involving MetAP2 and extracellular-signal-regulated kinase 1, or ERK1, a cell stress- and growth factor-stimulated kinase. This complex reduces the activation state of ERK1. A 2005 publicationin 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. Additionally, severalhormones well-documented to be involved in energy metabolism are affected by MetAP2 inhibitors, including leptin, adiponectin and fibroblastgrowth factor-21, or FGF-21. These hormones are thought to contribute to the weight-reducing effects of MetAP2 inhibitors like ZGN-1061, and alsoare known to be involved in control of body weight, fat metabolism and glucose metabolism. This series of mechanistic effects leads to rapid andsustained reduction of excess body weight with ZGN-1061 treatment, such as has been observed in animal studies and our clinical trial experience todate.An illustration of the MetAP2 inhibitor mechanism of action and therapeutic effects follows: In the figure above, LDLc means low density lipoprotein and CRP means C-reactive protein.Clinical TrialsBelow is a summary of the Phase 1 clinical trial that was completed with ZGN-1061, and the Phase 2 clinical trial that is ongoing with ZGN-1061as of the date of this Annual Report. 10 Table of ContentsPhase 1 Clinical TrialThe ZGN-1061 Phase 1 clinical trial, ZAF-1061-101, was a randomized, double-blind (subject, principal investigator and site staff), placebo-controlled trial consisting of a single ascending dose, or SAD, phase and a multiple ascending dose, or MAD, phase. The SAD phase was designed toassess effects of ZGN-1061 at six ascending dose levels relative to placebo in male or female healthy volunteers with a BMI of 23 to <30 kg/m2(normal weight or overweight individuals). The MAD phase assessed effects of twice-weekly subcutaneous injections (eight doses in total) ofZGN-1061 over four weeks at three ascending dose levels relative to placebo, in male or female healthy volunteers with BMI 27-40 kg/m2 (overweightor obese individuals). In addition to conventional safety and pharmacokinetic assessments, exploratory pharmacodynamic endpoints were alsoassessed. These measures were intended to provide a preliminary assessment of the potential of ZGN-1061 for weight management and inform thePhase 2 clinical trial design.In this clinical trial, ZGN-1061 was rapidly absorbed and cleared with no evidence of pro-thrombotic effects. ZGN-1061 was well-tolerated, withno serious adverse events, or SAEs, and no severe adverse events, or AEs. There were no AEs leading to early withdrawal from the clinical trial.Treatment with ZGN-1061 resulted in improvements across multiple metabolic measures. On average, patients treated with ZGN-1061 for four weekslost weight relative to placebo-treated patients (-4.6 lbs, -2.2 lbs, and -3.8 lbs for 0.2 mg, 0.6 mg, and 1.8 mg, respectively vs. -0.51 lbs for placebo-treated patients). Body weight loss was steady and progressive during treatment with ZGN-1061 and rebounded post-treatment, supporting a drugeffect. The clinical trial demonstrated trends for reductions in LDL-cholesterol and high-sensitivity C-reactive protein, or hsCRP.Phase 2 Clinical TrialThe ongoing ZGN-1061 Phase 2 clinical trial, ZAF-1061-201, is a randomized, double blinded, placebo-controlled trial with a core studyconsisting of three doses (0.05 mg, 0.3 mg and 0.9 mg) administered subcutaneously every three days of ZGN-1061 vs. placebo in a 1:1:1:1 ratio for12 weeks. The clinical trial is being conducted in 23 study sites in Australia and New Zealand. In addition to the primary objectives of assessing safety,tolerability and glycemic control, the effects of ZGN-1061 on multiple metabolic measures and cardiovascular risk factors will be evaluated.In order to guide business decisions and to understand more fully the dose responsive effects of ZGN-1061, we conducted an interim analysis atthe end of February 2018, using data derived from randomized patients at 8 weeks of treatment with the study drug (n = 57). This analysis wasperformed principally to confirm expectations of safety and tolerability of the drug, and to assess whether clear evidence of a pharmacological effectcould be observed at one or more doses of the drug, with A1C as the key endpoint. The interim analysis was pre-specified in the statistical analysisplan.ZGN-1061 appears to be safe and well-tolerated, with the frequency and types of reported adverse events being generally comparable to thoseobserved in the placebo group. There were no severe or serious adverse events. No patients in this interim dataset withdrew from the clinical trial due toadverse events. No treatment-related alterations were observed for circulating d-dimer, a robust and validated biomarker of blood clotting, or any othermarkers of coagulation. No venous thromboembolism events or occurrences of superficial thrombophlebitis were observed or reported.With respect to A1C, 8 weeks of treatment with 0.9 mg ZGN-1061 resulted in a 0.41% reduction from a baseline of 8.55% and a -0.57% placeboadjusted change in A1C, which was statistically significant with a p-value of less than 0.05, with 13 patients in the placebo arm and 13 patients in the0.9 mg ZGN-1061 arm.Though the interim analysis focused on 8 week data, a number of patients in the interim analysis had also completed 12 weeks in the trial,including eight and twelve patients in the 0.9 mg ZGN-1061 and placebo arms, respectively, and were assessed through a preliminary analysis. Theplacebo-adjusted difference in A1C 11 Table of Contentsincreased to -0.86% at 12 weeks of treatment with 0.9 mg ZGN-1061, which was associated with a p-value of less than 0.005 in the analysis. Thesepreliminary A1C changes are approaching the magnitude of A1C changes seen with our prior MetAP2 compound at 12 weeks.The increased A1C effect of 0.9 mg ZGN-1061 observed in the preliminary assessment at 12 weeks compared to 8 weeks was comprised by adecline, of 0.45% in A1C in the 0.9 mg arm, as well as an increase in A1C levels in the placebo arm of 0.41% from baseline. Though not typical, A1Cincreases were seen across the trial from weeks 8 to 12 in the placebo, 0.05 and 0.3mg dose arms in this preliminary analysis. A mixed-effect model forrepeated measures analysis, or MMRM, was employed for the interim analysis and is the pre-specified primary efficacy analysis method established foranalysis of A1C responses in the full clinical trial.Multiple secondary endpoint metabolic biomarkers, including body weight, showed some degree of positive response in the 0.9 mg dose arm ofZGN-1061, with varying degrees of significance, and will be saved to be presented at a later date as part of the full trial results.Together, the early safety and preliminary efficacy readout from this interim analysis indicate that 0.9 mg ZGN-1061 lacked untoward safetysignals, was well-tolerated, and effective in improving glycemic control. Based on these findings, we have decided to further explore the higher end oftherapeutic range of the drug by amending the study protocol to add an additional arm to the trial to evaluate the effects of a higher dose of ZGN-1061.This trial arm will include an additional 40 patients to be randomized to be treated with 1.8 mg ZGN-1061, 0.9 mg ZGN-1061, or placebo in a 2:1:1ratio. This selection of doses is being implemented to maximize overlap with the core clinical trial, evaluating placebo, 0.05 mg, 0.3 mg, and 0.9 mg,and the new arm which will also evaluate the 1.8 mg dose level. Based on exposure data and target engagement results from the previously completedPhase 1 clinical trial with ZGN-1061, we anticipate that the 1.8 mg dose should lead to nearly maximum engagement of the MetAP2 target and allowfor a more fulsome evaluation of the compound’s effective dose range as we have observed in animal models treated with doses leading to similarexposures and target engagement. We believe the additional data generated by the 1.8 mg dose arm will be informative as we set doses for subsequentclinical trials, particularly for the planned Phase 2b trial. The additional 1.8 mg dose arm is expected to run in parallel with the completion ofPhase 2b-enabling long-term toxicology studies and IND application preparations. We do not expect it to materially affect the initiation of thePhase 2b trial with ZGN-1061. We expect to report full results of the core part of this clinical trial mid-year 2018, and the results of the entire trialincluding the additional arm early in 2019.Next StepsWe plan to submit an IND application to the FDA after completion of our Phase 2 clinical trial, ZAF-1061-201, in support of additional clinicaltrials to be conducted in the United States.NonclinicalZGN-1061We have conducted toxicology studies of ZGN-1061 in support of clinical development. Based on the nonclinical assessment, ZGN-1061 is notgenotoxic. Dose selection and precautions for our completed Phase 1 and ongoing Phase 2 clinical trials have been informed by nonclinicaltoxicology studies. Toxicological studies of up to three months in multiple species using intermittent dosing have established no observed adverseeffect levels at higher exposures relative to the anticipated human doses. At higher doses, the findings of toxicological importance were primarilyinjection site reactions in rodents at high doses, as well as minimal/mild changes in the spinal cord and peripheral nerve at higher doses in largeranimal species. Six and nine month studies in multiple species, respectively, are in-progress and will be completed prior to the start of clinical trialprograms of longer than three months duration. Embryofetal toxicity studies in multiple species have also been completed and suggest that there is apotential risk for the developing embryo or fetus to patients who are pregnant at exposure above that anticipated in the clinic; therefore, appropriatebirth control and avoidance of pregnant persons within the clinical trial is mandatory. 12 Table of ContentsZGN-1258We have initiated GLP toxicology studies to support filing an IND application with the FDA for ZGN-1258. These studies are in progress andwill be completed prior to submission of an IND application during 2018.Future Product CandidatesWe are currently evaluating liver-targeted MetAP2 inhibitors as potential development candidates for the treatment of hepatic disorders. Thesestudies involve screening compounds with insights learned in our thrombosis investigations. We anticipate nominating one or more of thesecandidates for future development later in 2018.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.Manufacturing and SupplyZGN-1061 is a small molecule drug that is chemically synthesized from raw materials. The current process to produce ZGN-1061 drug product forPhase 2 clinical trials involves sterile filtration and lyophilization that is reconstituted prior to administration. The Phase 2 drug product has beenmanufactured and released at our drug product contract manufacturing organization, or CMO. The manufacturing processes for both drug substanceand drug product are under active development and optimization and are not yet validated for commercialization. We control our clinical trial supplychain by periodically meeting to assess clinical trial material needs and status of supply. The clinical supply forecast is managed internally by a crossfunctional working group and is used to aid in decision making for production planning.ZGN-1258 is a small molecule drug that is chemically synthesized from raw materials. The current process to produce ZGN-1258 for Phase 1clinical trials involves synthesis of drug substance and production of sterile liquid drug product which can be stored frozen. The Phase 2 drug productwill be developed as a sterile, lyophilized product for reconstitution prior to administration.We currently have no manufacturing facilities and limited personnel with manufacturing experience. We rely on contract manufacturers toproduce both drug substance and drug product required for our clinical trials. Any delays encountered with manufacturing activities, CMO schedulingor raw material supply could delay the manufacturing of finished drug product. No long-term supply agreements are in place with our contractors, andeach batch is individually contracted under a work order, which is governed by a quality agreement. We plan to continue to rely upon contractmanufacturers and, potentially, collaboration partners to manufacture commercial quantities of ZGN-1061 and ZGN-1258, if approved, or if we elect tocommercialize these product candidates on our own. Our current scale of manufacturing is adequate to support all of our current needs for clinical trialsupplies. For commercial quantities for larger populations, we will need to identify contract manufacturers or partners to produce ZGN-1061 on a largerscale.Sales and MarketingBased on our early stage of development, we have not yet established a commercial organization or distribution capabilities, nor have we enteredinto any partnership or co-promotion arrangements with an established pharmaceutical or biotechnology company. To develop the appropriatecommercial infrastructure to launch ZGN-1258, 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 availableresources. 13 Table of ContentsLicensesCKD LicenseIn July 2009, we entered into an Exclusive License Agreement with Chong Kun Dang Pharmaceutical Corp. of South Korea, or CKD, pursuant towhich we exclusively licensed beloranib from CKD on a worldwide basis, with the exception of South Korea. In consideration of such exclusivelicense, we paid an initial license fee to CKD, paid a one-time fee following initiation of a proof of concept trial, agreed to make milestone payments ofup to $30.0 million (of which $7.5 million has been paid, including $3.3 million that was paid in the form of our common stock (valued at $3.6million) as a result of an amendment to our license agreement and entry into a subscription agreement with CKD) to CKD upon the achievement ofcertain specified events, and agreed to pay a portion of sublicensing income to CKD. Furthermore, if we receive marketing approval for beloranib, wewill pay single-digit royalties to CKD based on annual net sales of beloranib on a country-by-country and product-by-product basis until the later tooccur of (i) the expiration of the last to expire patent in such country within the CKD patent rights containing a valid claim covering beloranib or itsuse for which regulatory approval has been obtained in such country, or (ii) ten years from the first commercial sale of beloranib in such country.Pursuant to this agreement, we committed to using commercially reasonable efforts to develop and commercialize beloranib. This agreement willremain in effect on a country-by-country and product-by-product basis until royalties are no longer due in such country, subject to earlier terminationby either party upon mutual consent, or in the event of uncured breach or insolvency on the part of the other party, or by us for any reason up to 60days’ 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 whichwe exclusively licensed certain patent rights from Children’s on a worldwide basis. The licensed patent rights relate to decreasing the growth of fattissue, and thereby cover the use of ZGN-1061 and related molecules as anti-obesity agents. In consideration of such exclusive license, we paid aninitial license fee upon execution of the license to Children’s and annual maintenance fees through the fifth anniversary of the date of the license. Wealso agreed to make milestone payments to Children’s of up to $2.7 million (of which $0.4 million has been paid) with respect to the first licensedproduct 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 certainspecified events and to pay a portion of sublicensing income to Children’s. If we receive marketing approval for ZGN-1061, we will pay single-digitroyalties to Children’s based on net sales of ZGN-1061 until the later to occur of (i) the expiration of the last to expire patent in such country within thelicensed patents containing a valid claim covering ZGN-1061 or (ii) 15 years from the date of the agreement. This agreement will remain in effect forthe longer of (i) 15 years and (ii) the life of the last expiring licensed patent, subject to earlier termination (x) by Children’s in the event of ourinsolvency 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 for anyreason 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 maintainingpatents intended to cover our products and compositions, their methods of use and any other inventions that are important to the development of ourbusiness. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patentprotection.Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially importanttechnology, inventions and know-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets andoperate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how, continuingtechnological 14 Table of Contentsinnovation and in-licensing opportunities to develop, strengthen and maintain the proprietary position of ZGN-1061 and our other developmentprograms.As of March 1, 2018, we own one issued U.S. Patent, two pending U.S. patent applications, with pending foreign counterpart patent applications,one pending Patent Cooperation Treaty, or PCT, patent application, as well as two pending U.S. provisional patent applications that relate toZGN-1061.As of March 1, 2018, we own two pending U.S. patent applications, and related worldwide patent applications, that relate to ZGN-1258.As of March 1, 2018, we own 19 issued U.S. patents, and 9 pending U.S. patent applications with pending foreign counterpart applications, all ofwhich relate to our internal efforts to discover novel MetAP2 inhibitors.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 whichwe file, the patent term is 20 years from the date of filing the non-provisional application. In the United States, a patent’s term may be lengthened bypatent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office, or U.S. PTO, in granting apatent, or may be shortened if a patent is terminally disclaimed over an earlier-filed patent. In addition, in certain instances, a patent term can beextended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. However, the restoration period cannot belonger than five years and the total patent term including the restoration period must not exceed 14 years following FDA approval. The duration offoreign patents varies in accordance with provisions of applicable local law, but typically is also twenty years from the earliest effective filing date. Ourissued patents will expire on dates ranging from 2020 to 2036. However, the actual protection afforded by a patent varies on a claim by claim andcountry to country basis for each applicable product and depends upon many factors, including the type of patent, the scope of its coverage, theavailability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent.Furthermore, the patent positions of biotechnology and pharmaceutical products and processes like those we intend to develop andcommercialize are generally uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowedin such patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either thepatent laws or in interpretations of patent laws in the United States and other countries can diminish our ability to protect our inventions, and enforceour intellectual property rights and more generally, could affect the value of intellectual property. Accordingly, we cannot predict the breadth of claimsthat may be allowed or enforced in our patents or in third-party patents.The biotechnology and pharmaceutical industries are characterized by extensive litigation regarding patents and other intellectual propertyrights. Our ability to maintain and solidify our proprietary position for our drugs and technology will depend on our success in obtaining effectiveclaims and enforcing those claims once granted. We do not know whether any of the patent applications that we may file or license from third partieswill result in the issuance of any patents. The issued 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 not provide us with proprietary protection or competitive advantages against competitors withsimilar technology. Furthermore, our competitors may be able to independently develop and commercialize similar drugs or duplicate our technology,business model or strategy without infringing our patents. Because of the extensive time required for clinical development and regulatory review of adrug we may develop, it is possible that, before any of our drugs can be commercialized, any related patent may expire or remain in force for only ashort period following commercialization, thereby reducing any advantage of any such patent.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 the other requirements for patentability are met, the first inventor 15 Table of Contentsto file a patent application will be entitled to the patent. This will require us to minimize the time from 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 difficultto protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our consultants,scientific advisors and contractors and invention assignment agreements with our employees. We also seek to preserve the integrity and confidentialityof our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technologysystems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached and we may nothave adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. Tothe extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to therights in related or resulting know-how and inventions. For more information, 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 ofany third-party patent would require us to alter our development or commercial strategies, or our drugs or processes, obtain licenses or cease certainactivities. Our breach of any license agreements or failure to obtain a license to proprietary rights that we may require to develop or commercialize ourfuture drugs may have a material adverse impact on us. If third parties prepare and file patent applications in the United States that also claimtechnology to which we have rights, we may have to participate in interference proceedings in the U.S. PTO, to determine priority of invention.In addition, substantial scientific and commercial research has been conducted for many years in the areas in which we have focused ourdevelopment efforts, which has resulted in third parties having a number of issued patents and pending patent applications. Patent applications in theUnited States and elsewhere are published only after 18 months from the priority date. The publication of discoveries in the scientific or patentliterature frequently occurs substantially later than the date on which the underlying discoveries were made. Therefore, patent applications relating todrugs similar to ZGN-1061, ZGN-1258 and any future drugs, discoveries or technologies we might develop may have already been filed by otherswithout our knowledge.CompetitionThe biopharmaceuticals industry is highly competitive. There are many public and private biopharmaceutical companies, universities,governmental agencies and other research organizations actively engaged in the research and development of products that may be similar to ourproduct candidates or address similar markets. It is probable that the number of companies seeking to develop products and therapies similar to ourproducts will increase. Many of these and other existing or potential competitors have substantially greater financial, technical and human resourcesthan we do and may be better equipped to develop, manufacture and market products. These competitors may develop and introduce products andprocesses comparable or superior to ours.Existing Type 2 Diabetes DrugsBiguanides (metformin) is first line pharmacotherapy for the treatment of type 2 diabetes primarily due to the extensive experience, low cost andfavorable benefit risk associated with it. While metformin is likely to remain the initial choice for the treatment of type 2 diabetes, ZGN-1061 willcompete with sulfonylureas, GLP-1 receptor agonists, DPP4 inhibitors, SGLT2 inhibitors, thiazoladinediones, insulin, and various combinationproducts. Although these pharmacotherapies are all effective to some extent in the treatment of type 2 diabetes, they each have notable limitations, andhave not been found to halt the progression of type 2 diabetes. Therefore, additional effective and durable options are needed. 16 Table of ContentsThere are a number of pharmaceutical and biotechnology companies that have type 2 diabetes drugs that are pursuing products with uniquemechanisms of action for the treatment of type 2 diabetes.PWS DrugsThere are no current pharmacological treatments for regulating hunger and hyperphagia-related behaviors of patients with PWS, and bariatricsurgery is contraindicated in patients with PWS. Multiple products are currently under investigation for treatment of hyperphagia and/or obesity inindividuals with PWS including assessment of diazoxide choline controlled-release for treatment of hyperphagia by Soleno Therapeutics, Inc.,intranasal carbetocin for treatment of hyperphagia by Levo Therapeutics Inc., and liraglutide for weight management by Novo Nordisk. These threeinvestigational products are either under Phase 3 assessment or are preparing for Phase 3 assessment. Several products are being explored in variousstages of Phase 1 and Phase 2 of development. No products under investigation by other companies are MetAP2 inhibitors and the safety and efficacyof their product candidates have not yet been established.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-approval monitoring and reporting, marketing and export and import of drug products such as ZGN-1061 and ZGN-1258. Generally,before a new drug can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specificto each regulatory authority, submitted for review and approved by the regulatory authority.U.S. Drug DevelopmentIn the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. Drugsare also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliancewith appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure tocomply with the applicable United States requirements at any time during the product development process, approval process or after approval, maysubject an applicant to administrative or judicial sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pendingapplications, withdrawal of an approval, a clinical hold, untitled or warning letters, voluntary product recalls, withdrawals from the market, productseizures, total or partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement, or civilor criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.Our product candidates must be approved by the FDA through the New Drug Application, or NDA, process before they may be legally marketedin the United States. The process required 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 nonclinical laboratory tests, 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-relatedregulations, sometimes referred to as good clinical practices, or GCPs, to establish the safety and efficacy of the proposed drug for itsproposed indication; • Submission to the FDA of an NDA for a new drug; 17 Table of Contents • 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 assesscompliance with the FDA’s current good manufacturing practice, or cGMP, requirements to assure that the facilities, methods and controlsare adequate to preserve the drug’s identity, strength, quality and purity; • Potential FDA audit of the nonclinical study 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: nonclinical and clinical. For new chemical entities, thenonclinical development stage generally involves synthesizing the active component, developing the formulation and determining the manufacturingprocess, as well as carrying out non-human toxicology, pharmacology and drug metabolism studies in the laboratory, which support subsequentclinical testing. The conduct of the nonclinical tests must comply with federal regulations, including GLPs. The sponsor must submit the results of thenonclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, tothe FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational drug product to humans. The INDautomatically becomes effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical trialsand places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concernsbefore the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any time before or during clinical trials due to safetyconcerns or non-compliance. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or that,once begun, issues will not arise that could cause the clinical 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 ofqualified investigators, generally physicians not employed by or under the clinical trial sponsor’s control, in accordance with GCPs, which include therequirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted underprotocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and theparameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submittedto the FDA as part of the IND. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at orservicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of clinical trialparticipants 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 legalrepresentative and must monitor the clinical trial until completed. There are also requirements governing the reporting of ongoing clinical trials andcompleted clinical trial results to public 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 1clinical trials generally involve a small number of healthy volunteers who are initially exposed to a single dose and then multiple doses of the productcandidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic action, side effect tolerability and safety of the drug.Phase 2 clinical trials typically involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At the sametime, safety and further pharmacokinetic and pharmacodynamic information is collected, as well as identification of possible adverse effects and safetyrisks and preliminary evaluation of efficacy. Phase 3 clinical trials generally involve large numbers of patients at multiple sites, in multiple countries(from several hundred to several thousand subjects) and are designed to provide the data 18 Table of Contentsnecessary to demonstrate the efficacy of the product for its intended use, its safety in use, and to establish the overall benefit/risk relationship of theproduct and provide an adequate basis for physician labeling. Phase 3 clinical trials may include comparisons with placebo and/or other comparatortreatments. 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, although additional Phase 3 clinical trials may be required for certainindications.Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These clinical trials areused to gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate theperformance of Phase 4 clinical 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 besubmitted to the FDA and the investigators for serious and unexpected suspected adverse events, findings from animal or in vitro testing or otherstudies that suggest a significant risk for human subjects and any clinically important increase in the rate of a serious suspected adverse reaction overthat listed in the protocol or investigator brochure. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specifiedperiod, if at all. The FDA, the IRB, or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that theresearch subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial atits institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpectedserious harm to patients. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trialsponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a clinical trial may move forwardat designated check points based on access to certain data from the clinical trial. We may also suspend or terminate a clinical trial based on evolvingbusiness objectives and/or competitive climate. Concurrent with clinical trials, companies usually complete additional animal studies and must alsodevelop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the productin commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing qualitybatches of the drug candidate and manufacturers, among other things, must develop methods for testing the identity, strength, quality and purity of thefinal drug product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that thedrug candidate does not undergo unacceptable deterioration over its shelf life.NDA and FDA Review ProcessFollowing clinical trial completion, clinical trial data are analyzed to assess safety and efficacy. The results of nonclinical studies and clinicaltrials are then submitted to the FDA as part of an NDA, along with proposed labeling for the product and information about the manufacturing processand facilities that will be used to ensure product quality, results of analytical testing conducted on the chemistry of the drug, and other relevantinformation. The NDA is a request for approval to market the drug and must contain proof of safety and efficacy, which is demonstrated by extensivenonclinical and clinical testing. The application includes both negative or ambiguous results of nonclinical studies and clinical trials as well aspositive findings. Data may come from company-sponsored clinical trials intended to test the safety and efficacy of a use of a product, or from a numberof alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality andquantity to establish the safety and efficacy of the investigational drug product to the satisfaction of the FDA. The submission of an NDA is subject tothe payment of substantial user fees; a waiver of such fees may be obtained under certain limited circumstances. FDA approval of an NDA must beobtained before a drug may be offered for sale in the United States. 19 Table of ContentsUnder the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a user fee. The FDA adjusts the PDUFAuser fees on an annual basis. According to the FDA’s fee schedule for fiscal year 2018, the user fee for an application requiring clinical data, such as anNDA, is $2,421,495. PDUFA also imposes an annual prescription drug product program fee for human drugs of $304,162. Fee waivers or reductions areavailable in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user feesare assessed on NDAs for products designated as orphan drugs, unless the product also includes a non-orphan indication.The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA forfiling. The FDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted for filing, the FDAbegins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has 10 months from the filing date inwhich to complete its initial review of a standard new molecular-entity NDA and respond to the applicant, and six months from the filing date for apriority new molecular-entity NDA. The FDA does not always meet its PDUFA goal dates for standard and priority NDAs, and the review process isoften 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 issafe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’sidentity, strength, quality and purity. The FDA may refer applications for novel drug products or drug products which present difficult questions ofsafety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendationas to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisorycommittee, but it considers such recommendations carefully when making decisions. The FDA will likely re-analyze the clinical trial data, which couldresult in extensive discussions between the FDA and us during the review process. The review and evaluation of an NDA by the FDA is extensive andtime consuming and may take longer than originally planned to complete, and we may not receive a timely approval, if at all.Before approving an NDA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to determinewhether they comply with cGMPs. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are incompliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. In addition, beforeapproving an NDA, the FDA may also audit data from clinical trials to ensure compliance with GCP requirements. After the FDA evaluates theapplication, manufacturing process and manufacturing facilities, it may issue an approval letter or a Complete Response Letter. An approval letterauthorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates thatthe 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 additionalpivotal Phase 3 clinical trial(s), and/or other significant and time-consuming requirements related to clinical trials, nonclinical studies ormanufacturing. If a Complete Response Letter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in theletter, or withdraw the application. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy thecriteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the samedata.There is no assurance that the FDA will ultimately approve a drug product for marketing in the United States and we may encounter significantdifficulties or costs during the review process. If a product receives marketing approval, the approval may be significantly limited to specific diseasesand dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may requirethat certain contraindications, warnings or precautions be included in the product labeling or may 20 Table of Contentscondition the approval of the NDA on other changes to the proposed labeling, development of adequate controls and specifications, or a commitmentto conduct post-market testing or clinical trials and surveillance to monitor the effects of approved products. For example, the FDA may require Phase 4testing which involves clinical trials designed to further assess drug safety and effectiveness and may require testing and surveillance programs tomonitor the safety of approved products that have been commercialized. The FDA may also place other conditions on approvals including therequirement for a Risk Evaluation and Mitigation Strategy, or REMS, to assure the safe use of the drug. If the FDA concludes a REMS is needed, thesponsor of the NDA must submit a proposed REMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS couldinclude medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registriesand other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution,prescription or dispensing of products. Product approvals may be withdrawn for non-compliance with regulatory standards or if problems occurfollowing 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 is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in theUnited States and for which there is no reasonable expectation that the cost of developing and making a drug or biological product available in theUnited States for this type of disease or condition will be recovered from sales of the product. Orphan product designation must be requested beforesubmitting an NDA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosedpublicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approvalprocess.If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has suchdesignation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market thesame drug or biological product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority tothe product with orphan exclusivity. Competitors, however, may receive approval of different products for the indication for which the orphan producthas exclusivity or obtain approval for the same product but for a different indication for which the orphan product has exclusivity. Orphan productexclusivity also could block the approval of one of our products for seven years if a competitor obtains approval of the same drug product as definedby the FDA or if our product candidate is determined to be contained within the competitor’s product for the same indication or disease. If a drug orbiological product designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not beentitled 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 areintended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Trackdesignation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a new drug or biologicmay request the FDA to designate the drug or biologic as a Fast Track product at any time during the clinical development of the product. Unique to aFast Track product, the FDA may consider for review sections of the marketing application on a rolling basis before the complete application issubmitted, if the sponsor provides a schedule for the submission of the sections of the application, the FDA agrees to accept sections of the applicationand determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the application. 21 Table of ContentsAny product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programsintended to expedite development and review, such as priority review and accelerated approval.Any product is eligible for priority review if it treats a serious or life-threatening condition and, if approved, would provide a significantimprovement in safety and effectiveness compared to available therapies. The FDA will attempt to direct additional resources to the evaluation of anapplication for a new drug or biologic designated for priority review in an effort to facilitate the review.Drug or biological products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningfultherapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate andwell-controlled clinical trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, oron the basis of an effect on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is reasonably likely topredict an effect on IMM or other clinical benefit. As a condition of approval, the FDA may require that a sponsor of a drug or biological productreceiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. If the FDA concludes that a drug shown to beeffective can be safely used only if distribution or use is restricted, it will require such post-marketing restrictions as it deems necessary to assure safeuse 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 requiresas a condition for accelerated approval, pre-approval of promotional materials, which could adversely impact the timing of the commercial launch ofthe product.Additionally, a drug or biological product may be eligible for designation as a Breakthrough Therapy if the product is intended, alone or incombination with one or more other drugs or biologics, to treat a serious or life-threatening condition and preliminary clinical evidence indicates thatthe product may demonstrate substantial improvement over currently approved therapies on one or more clinically significant endpoint. The benefitsof Breakthrough Therapy designation include the same benefits as Fast Track designation, plus intensive guidance from the FDA to ensure an efficientdrug development program. Fast Track designation, priority review, accelerated approval and Breakthrough Therapy designation do not change thestandards for approval but may expedite the development or approval process.Pediatric Clinical TrialsUnder the Pediatric Research Equity Act, or PREA, as amended, an NDA or supplement to an NDA must contain data to assess the safety andefficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatricsubpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. The FDCArequires 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 anend-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 studiesthat the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification fornot including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to providedata from pediatric studies along with supporting information. The FDA and the sponsor must reach agreement on the PSP. A sponsor can submitamendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from nonclinicalstudies, early phase clinical trials, and/or other clinical 22 Table of Contentsdevelopment programs. Submission of a PSP as defined in FDASIA is not required for programs with orphan drug designation.Post-Marketing RequirementsFollowing approval of a new product, a pharmaceutical or biotechnology company and the approved product are subject to continuingregulation by the FDA, including, among other things, monitoring and recordkeeping activities, reporting to the applicable regulatory authorities ofadverse experiences with the product, providing the regulatory authorities with updated safety and efficacy information, product sampling anddistribution requirements, and complying with promotion and advertising requirements, which include, among others, standards for direct-to-consumeradvertising, restrictions on promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as“off-label use”), and requirements for promotional activities involving the internet. The FDA also imposes limitations on industry-sponsored scientificand educational activities Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or promote suchoff-label uses Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. Modifications or enhancementsto the product or its labeling or changes of the site of manufacture are often subject to the approval of the FDA and other regulators, which may or maynot be received or may result in a lengthy review process.Any distribution of prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act, or thePDMA, a part of the FDCA.In the United States, once a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA. The FDAregulations require that products be manufactured in specific facilities, which are inspected as part of the FDA’s review of the NDA, and in accordancewith cGMP. We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products inaccordance with cGMP regulations. cGMP regulations require among other things, quality control and quality assurance as well as the correspondingmaintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Drug manufacturers and otherentities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain stateagencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other 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 andquality assurance activities. NDA holders using contract manufacturers, laboratories or packagers are responsible for the selection and monitoring ofqualified firms, and, in certain circumstances, qualified suppliers to these firms. These firms and, where applicable, their suppliers are subject toinspections by the FDA at any time, and the discovery of violative conditions, including failure to conform to cGMP, could result in enforcementactions that interrupt the operation of any such facilities or the ability to distribute products manufactured, processed or tested by them. Discovery ofproblems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved NDA, including, among otherthings, voluntary 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-marketingsurveillance to monitor 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 unknown problems with a product or the failure to comply with applicable FDA requirements can have negativeconsequences, including adverse publicity, judicial or administrative enforcement, untitled or warning letters from the FDA, mandated correctiveadvertising or communications with doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness datamay require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require theimplementation of other risk management measures. Also, new government requirements, including those 23 Table of Contentsresulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of ourproducts under development.Other Regulatory MattersManufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatoryauthorities in addition to the FDA, including, in the United States, the Centers for Medicare & Medicaid Services, other divisions of the Department ofHealth and Human Services, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, theOccupational Safety & Health Administration, the Environmental Protection Agency and state and local governments. In the United States, sales,marketing and scientific/educational programs must also comply with state and federal fraud and abuse laws. Pricing and rebate programs must complywith the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements in the Patient Protectionand Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or ACA. If products are made available toauthorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. The handling of anycontrolled substances must comply with the U.S. Controlled Substances Act and Controlled Substances Import and Export Act. Products must meetapplicable child-resistant packaging requirements under the U.S. Poison Prevention Packaging Act. Manufacturing, sales, promotion and otheractivities 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 and security 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, failureto meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, voluntary recall or seizure ofproducts, total or partial suspension of production, denial or withdrawal of product approvals, or refusal to allow a firm to enter into supply contracts,including government contracts. In addition, even if a firm complies with FDA and other requirements, new information regarding the safety or efficacyof a product could lead the FDA to modify or withdraw product approval. Prohibitions or restrictions on sales or withdrawal of future productsmarketed 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 to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the voluntary recall or discontinuation of ourproducts; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of ourbusiness.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 forlimited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-WaxmanAmendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during productdevelopment and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND andthe submission date of an NDA plus the time between the submission date of an NDA and the approval of that application, minus any time theapplicant did not act with due diligence. Only one patent applicable to an approved drug is eligible for the extension and the application for theextension must be submitted prior to the expiration of the patent. The U.S. PTO, in consultation with the FDA, reviews and approves the application forany patent term extension or 24 Table of Contentsrestoration. In the future, we intend to apply for restoration of patent term for one of our currently owned or licensed patents to add patent life beyondits current expiration date, depending on the expected length of 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 FDCAprovides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for a newchemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, whichis the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review anabbreviated 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 the original innovator drug or for another indication, where the applicant does notown 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 acertification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also providesthree years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability studies,that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example for newindications, dosages or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval onthe basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the originalindication 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 nonclinical studies and adequate and well-controlledclinical trials necessary to demonstrate safety and effectiveness. Orphan drug exclusivity, as described above, may offer a seven-year period ofmarketing exclusivity, except in certain circumstances. Pediatric exclusivity is another type of regulatory market exclusivity in the United States.Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the endof other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued“Written Request” for such a clinical 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 productscan only be marketed if a marketing authorization from the competent regulatory agencies has been obtained.Similar to the United States, the various phases of nonclinical and clinical research in the European Union are subject to significant regulatorycontrols. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the European Union clinical trials regulatory framework,setting out common rules for the control and authorization of clinical trials in the European Union, the European Union Member States havetransposed and applied the provisions of the Directive differently. This has led to significant variations in the member state regimes. Under the currentregime, before a clinical trial can be initiated it must be approved in each of the European Union countries where the clinical trial is to be conducted bytwo distinct bodies: the National Competent Authority, or NCA, and one or more Ethics Committees, or ECs. Under the current regime all suspectedunexpected serious adverse reactions to the investigated drug that occur during the clinical trial have to be reported to the NCA and ECs of theMember State where they occurred. In April 2014, the European Union adopted a new Clinical Trials Regulation (EU) No 536/2014, which is set toreplace the current Clinical Trials Directive 2001/20/EC. It is expected that the new Clinical Trials Regulation will apply in 2019. It will overhaul thecurrent system of approvals for clinical trials in the European Union. Specifically, the new legislation, which will be directly applicable in all memberstates, aims at simplifying and streamlining the approval of clinical trials in the European Union. For instance, the new Clinical Trials Regulationprovides for a streamlined application procedure via a single entry point and strictly defined deadlines for the assessment of clinical trial applications. 25 Table of ContentsEuropean Union Drug Review and ApprovalIn the European Economic Area, or EEA, which is comprised of the 28 Member States of the European Union plus Norway, Iceland andLiechtenstein, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of marketingauthorizations:The Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committeefor Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and which is valid throughout the entire territory of theEEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, andmedicinal products containing a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immuneand viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for productsthat constitute a significant therapeutic, scientific or technical innovation or which are 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, areavailable for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketingin a Member State of the EEA, this National MA can be recognized in another Member States through the Mutual Recognition Procedure. If theproduct has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member Statesthrough the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is submitted to the competent authorities of each of theMember States in which the MA is sought, one of which is selected by the applicant as the Reference Member State, or RMS. The competent authorityof the RMS prepares a draft assessment report, a draft summary of the product 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 States Concerned) for their approval. If the Member States Concerned raise noobjections, based on a potential serious risk to public health, to the assessment, SPC, labeling, or packaging proposed by the RMS, the product issubsequently granted a national MA in all the Member States (i.e. in the RMS and the Member States Concerned).Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make anassessment of 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 uponmarketing authorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatory authorities in theEuropean Union from referencing the innovator’s data to assess a generic application for eight years, after which generic marketing authorization canbe submitted, and the innovator’s data may be referenced, but not approved for two years. The overall ten-year period will be extended to a maximumof 11 years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more newtherapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparisonwith existing therapies.European Union Orphan Designation and ExclusivityIn the European Union, the European Commission, upon the recommendation of the EMA’s Committee for Orphan Medicinal Products grantsorphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of life-threatening orchronically debilitating conditions affecting not more than 5 in 10,000 persons in the European Union and for which no satisfactory method of 26 Table of Contentsdiagnosis, prevention, or treatment has been authorized (or the product would be a significant benefit to those affected). Additionally, designation isgranted for products intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic conditionand when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment indeveloping 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 ofmarket exclusivity is granted following medicinal product approval. This period may be reduced to six years if the orphan drug designation criteria areno longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. Orphan drugdesignation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in,or shorten the duration of, the regulatory review 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 healthprograms, commercial insurance and managed healthcare organizations. These third-party payors are increasingly reducing reimbursements for medicalproducts and services.Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been afocus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containmentprograms, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls andcost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our netrevenue and results. Decreases in third-party reimbursement for our product candidate or a decision by a third-party payor to not cover our productcandidate could reduce physician usage of the product candidate and have a material adverse effect on our sales, results of operations and financialcondition.The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, established the Medicare Part D program toprovide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plansoffered by private entities which provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized.Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary thatidentifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeuticcategory and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescriptiondrug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugsmay increase demand for products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part Dprescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits forMedicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Anyreduction 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 differenttreatments for the same illness. The plan for the research was published in 2012 by the Department of Health and Human Services, the Agency forHealthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures aremade to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or privatepayors, it is not clear what effect, if any, the research will have on the sales of our product candidates, if any such product or the condition that it isintended to treat is the subject of a trial. It is 27 Table of Contentsalso possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our productcandidates. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover ourproducts after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on aprofitable basis.The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively theACA, enacted in March 2010, has a significant impact on the health care industry. The ACA is intended to expand coverage for the uninsured while atthe same time containing overall healthcare costs. With regard to pharmaceutical products, among other things, the ACA expands and increasesindustry rebates for drugs covered under Medicaid programs and makes changes to the coverage requirements under the Medicare Part D program.Pharmaceutical manufacturers are required to track certain financial arrangements with physicians and teaching hospitals, including any “transfer ofvalue” made or distributed to such entities, as well as any investment interests held by physicians and their immediate family members. Manufacturersare required to annually report this information to The Center for Medicare and Medicaid services, or CMS, which posts the information on its website.Since its enactment, there have been challenges to numerous aspects of the ACA, including efforts to repeal and replace the ACA, and the ACAhas been modified in a number of respects. While Congress has not passed repeal legislation to date, the 2017 Tax Reform Act includes a provisionrepealing the individual mandate, effective January 1, 2019. Further, on January 20, 2017, President Trump signed an Executive Order directing federalagencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision ofthe ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers ofpharmaceuticals or medical devises. On October 13, 2017, President Trump signed an Executive Order terminating the cost-sharing subsidies thatreimburse the insurers under the ACA. Several state Attorneys General filed suit to stop the administration from terminating the subsidies, but theirrequest for a restraining order was denied by a federal judge in California on October 25, 2017. In addition, CMS has recently proposed regulations thatwould give states greater flexibility in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect ofrelaxing the essential health benefits required under the ACA for plans sold through these marketplaces. Congress will likely consider other legislationto replace elements of the ACA. We cannot predict how the ACA, its possible repeal or replacement, any further action to modify the ACA, or thepolitical uncertainty surrounding the ACA will affect our business.In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, theBudget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on DeficitReduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reachrequired goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions toMedicare payments to providers of up to 2% per fiscal year, started in April 2013. On January 2, 2013, then President Obama signed into law theAmerican Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by these sequestrationprovisions of the Budget Control Act of 2011. The ATRA, among other things, also reduced Medicare payments to several providers, includinghospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments toproviders from three to five years. We expect that additional federal healthcare reform measures will be adopted in the future, any of which could limitthe amounts that federal and state governments will pay for healthcare products and services, and in turn could significantly reduce the projected valueof 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 requirementsgoverning drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict therange of medicinal products for which 28 Table of Contentstheir national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state mayapprove a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the companyplacing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations forpharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in theEuropean Union do not follow price structures of the United States and generally tend to be significantly lower.Other Healthcare Laws and Compliance RequirementsIf we obtain regulatory approval of our products, we may be subject to various federal and state laws targeting fraud and abuse in the healthcareindustry. These laws may impact, among other things, our proposed sales, marketing and education programs. In addition, we may be subject to patientprivacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operateinclude: • the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving,offering or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of anindividual for, or the purchase, order, or recommendation of, an item or service reimbursable under a federal healthcare program, such as theMedicare and Medicaid programs; • federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entitiesfrom knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that arefalse or fraudulent, or making a false statement or record material to payment of a false claim or avoiding, decreasing, or concealing anobligation to pay money to the federal government; • the federal Health Insurance Portability and Accountability Act of 1996, or HIPPA, which created new federal criminal statutes that prohibitexecuting a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters; • the federal transparency laws, including the federal Physician Payment Sunshine Act, which is part of the ACA, that requires applicablemanufacturers of covered drugs and biologics to disclose payments and other transfers of value provided to physicians and teachinghospitals and physician ownership and investment interests; • HIPPA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, whichimposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and • state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or servicesreimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of healthinformation in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thuscomplicating compliance efforts.EmployeesAs of March 1, 2018, we employed 35 full-time employees, including 29 in research and development and 6 in general and administrative. Wehave never had a work stoppage, and none of our employees is represented by a labor organization or under any collective-bargaining arrangements.We consider our employee relations to be good. 29 Table of ContentsOur 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. We may post materialinformation on our website, therefore please check our website to see if we have posted any material information.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 Form8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, or theExchange Act. We make these reports available through our website as soon as reasonably practicable after we electronically file such reports with, orfurnish 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 FStreet, 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 publicreference room. You can review our electronically filed reports and other information that we file with the SEC on the SEC’s web site athttp://www.sec.gov. We also make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10%stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by thosepersons. The information contained on, or that can be accessed through, our website is not a part of 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 otherinformation in this Annual Report on Form 10-K, or Annual Report, and in our other public filings before making an investment decision. Ourbusiness, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us orthat we currently consider immaterial. If any such risks or uncertainties actually occur, our business, financial condition or operating results coulddiffer materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report and in our other public filings. The trading price ofour common stock could decline due to any of these risks, and as a result, you may lose all or part of your investment.Risks Related to Product Development, Regulatory Approval and CommercializationWe currently depend primarily on the success of one product candidate, ZGN-1061, which has completed Phase 1 and is currently in Phase 2 clinicaldevelopment. We cannot be certain that we will be able to obtain regulatory approval for ZGN-1061, or successfully commercialize ZGN-1061 ifapproved.We currently have only one product candidate in clinical development, ZGN-1061, which has completed Phase 1 clinical development in theNetherlands and is in Phase 2 clinical development in Australia and New Zealand, and our business currently depends primarily on its successfulclinical development, regulatory approval and commercialization. We currently have no drug products for sale and may never be able to developmarketable drug products. In order to conduct clinical trials in the United States we need to file an Investigational New Drug, or IND, application withthe U.S. Food and Drug Administration, or FDA. Because our business is primarily dependent upon this one product candidate, any setback in ourpursuit of regulatory approval for ZGN-1061 would have a material adverse effect on our business and prospects. The clinical trials of our productcandidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation bynumerous government authorities in the United States and in other countries where we intend to test and, if approved, market any product candidate.Before obtaining regulatory approvals 30 Table of Contentsfor the commercial sale of any product candidate, we must demonstrate through nonclinical testing and clinical trials that the product candidate is safeand effective for use in each target indication. This process can take many years and will likely include post-marketing studies, or PMS, post-marketingrequirements, or PMRs, and surveillance such as Risk Evaluation and Mitigation Strategies, or REMS, which will require the expenditure of substantialresources beyond the proceeds we currently have on hand.Furthermore, we are not permitted to market ZGN-1061 in the United States until we receive approval of a New Drug Application, or NDA, fromthe FDA, or in any foreign countries until we receive the requisite marketing approval from such countries. Development of diabetes drugs requiresapproximately 2,500 subjects randomized to active doses of the product with 1,300 to 1,500 subjects exposed for a year and 300 to 500 subjectsexposed for 18 months in order to estimate the safety of the drug in an NDA. In addition, it is anticipated that the FDA may require that their guidancefor assessment of cardiovascular risk with diabetes products be followed which may require testing of 5,000 to 10,000 subjects. Meeting therequirements of the FDA or certain European regulatory authorities may require that we conduct additional pivotal clinical trials. Accordingly,obtaining approval of an NDA or Marketing Authorization Application, or MAA, is a complex, lengthy, expensive and uncertain process.The FDA and certain European regulatory authorities may delay, limit or deny approval of ZGN-1061 for many reasons, including, among others: • the FDA may not accept our IND application for ZGN-1061 or may put it on clinical hold; • we may not be able to demonstrate that ZGN-1061 is safe and effective to the satisfaction of the FDA and the European Medicines Agency,or EMA; • the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA and EMA for marketingapproval; • 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 nonclinical studies; • the FDA and EMA may not approve the formulation, labeling or specifications of ZGN-1061; • the contract research organizations, or CROs, that we retain to conduct our clinical trials may take actions outside of our control thatmaterially adversely impact our clinical trials; • the FDA and EMA may find the data from nonclinical studies and clinical trials insufficient to demonstrate that ZGN-1061’s clinical andother benefits outweigh its safety risks; • the FDA and EMA may disagree with our interpretation of data from our nonclinical 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 is determined to require an FDA advisory committee assessment, or the advisory committee mayrecommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional nonclinicalstudies or clinical trials, limitations on approved labeling or distribution and use restrictions; • the FDA could require development of a REMS as a condition of approval or post-approval, or may not agree with our proposed REMS, ormay impose additional requirements that limit the promotion, advertising, distribution, or sales of ZGN-1061; • the FDA and EMA may find deficiencies with or not approve the manufacturing processes or facilities of third-party manufacturers withwhich we contract; or • the FDA and EMA may change their approval policies or adopt new regulations. 31 Table of ContentsAny of these factors, many of which are beyond our control, could jeopardize our ability to obtain and/or maintain regulatory approval for andsuccessfully market ZGN-1061. Of the large number of drugs in development in the United States, only a small percentage will successfully completethe FDA regulatory approval process and be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund ourdevelopment and clinical trials, we cannot assure you that ZGN-1061 or any other of our product candidates will be successfully developed orcommercialized.We cannot be certain that we will be able to successfully complete clinical trials for our product candidates, obtain regulatory approval for ourproduct candidates or successfully commercialize our product candidates, if approved.We currently have only one product candidate in clinical development, ZGN-1061, which has completed Phase 1 clinical development in theNetherlands and is in Phase 2 clinical development in Australia and New Zealand, and our business currently depends primarily on its successfulclinical development, regulatory approval and commercialization. We recently announced a new product candidate, ZGN-1258, which is innonclinical development. We expect to initially develop ZGN-1258 as a treatment for Prader-Willi syndrome, or PWS. Before our product candidatescan be marketed, our IND application must go into effect permitting the conduct of clinical trials, then we must successfully complete human testing.The FDA and other comparable foreign regulatory agencies must approve our NDA or comparable regulatory submissions. Even after successfulcompletion of clinical testing, there is a risk that the FDA may request further information from us, disagree with our findings or otherwise undertake alengthy review of our submission. Even if the FDA approves our NDA, we may be unable to successfully commercialize our product candidates.It is possible, that the FDA will not approve any application that we may submit. It is possible that our product candidates may not obtainappropriate regulatory approvals necessary for us to commence clinical trials for our product candidates. Any delay or failure in obtaining requiredapprovals could have a material adverse effect on our business. This process can take many years and will likely require the expenditure of substantialresources beyond the proceeds we currently have on hand.Favorable results from nonclinical studies, our Phase 1 clinical trial of ZGN-1061 and interim analysis of our Phase 2 clinical trial of ZGN-1061 arenot necessarily predictive of the results of additional nonclinical studies or later-stage clinical trials of ZGN-1061. Given the thrombosis findings inhumans treated with beloranib, development costs for ZGN-1061 may be higher and we may be unable to successfully develop, obtain regulatoryapproval for and commercialize ZGN-1061.Favorable results from our nonclinical studies of ZGN-1061, our Phase 1 clinical trial and interim analysis of our Phase 2 clinical trial ofZGN-1061 may not necessarily be predictive of the results from ongoing and later-stage clinical trials. To date we have shown that ZGN-1061 hassimilar potency against the MetAP2 target and similar activity in rodent models of obesity compared to beloranib. Toxicology studies in multiplespecies have shown that ZGN-1061 is not exhibiting any testicular safety signals or activation of thrombosis-related biochemical markers, and displaysan appreciable margin for embryofetal toxicity, testicular toxicity, pro-thrombotic effects and other previously observed issues for MetAP2 inhibitorssuch as hematological and neuronal toxicities with a small therapeutic margin and no margin for embryofetal toxicity. Further in our Phase 1 clinicaltrial, ZGN-1061 demonstrated rapid drug absorption and clearance in line with criteria established in advance for the molecule, and has a favorabletolerability profile with no safety signals identified, including no evidence of pro-thrombotic effects. The data show that ZGN-1061 causesimprovements across multiple metabolic measures consistent with MetAP2 inhibition, and patients in the clinical trial experienced mean weight loss ofup to approximately one pound per week. In addition, data from the interim analysis of the Phase 2 clinical trial of ZGN-1061 demonstrated a favorableglycated hemoglobin A1C, or A1C, effect at the 0.9 mg dose of ZGN-1061. However, we can provide no assurance that the results of our nonclinicalstudies, Phase 1 clinical trial of ZGN-1061 and interim analysis of our Phase 2 clinical trial of ZGN-1061 will be replicated in ongoing or later-stageclinical trials of ZGN-1061 or other nonclinical studies. 32 Table of ContentsMany companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in clinical trials after achieving positiveresults in nonclinical and early-stage clinical development. In particular, we have suffered significant setbacks in later-stage clinical trials of our formerlead product candidate, beloranib, after achieving positive results in nonclinical and clinical development, and we cannot be certain that we will notface similar setbacks in our development of ZGN-1061. The setbacks in later-stage clinical development have been caused by, among other things,nonclinical findings made while clinical trials were underway or safety or efficacy observations made in clinical trials, including previously unreportedor understood adverse events. Moreover, nonclinical and clinical data are often susceptible to varying interpretations and analyses, and manycompanies that believed their product candidates performed satisfactorily in nonclinical studies and clinical trials nonetheless failed to obtain FDAand/or EMA approval. If we fail to produce positive results in our later-stage clinical trials of ZGN-1061, the development timeline and regulatoryapproval and commercialization prospects for our lead product candidate, and, correspondingly, our business and financial prospects, would bematerially adversely affected.Our product candidates may cause undesirable side effects that could delay or prevent their regulatory approval, limit the commercial profile of anapproved label, 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 haltclinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. Forexample, common adverse events observed in patients treated with our first-generation MetAP2 inhibitor, beloranib, versus placebo included diarrhea,injection site bruising, dizziness, decreased appetite, anxiety and sleep disturbances (insomnia principally manifested as delayed onset of sleep andabnormal dreams), among others. In addition, an imbalance in the number of thrombotic events observed in patients treated with beloranib as comparedto patients on placebo in our clinical trials was observed. We may see similar adverse events with ZGN-1061 or ZGN-1258 as we saw with beloranib,and therefore, we will study these parameters in nonclinical and clinical development of ZGN-1061 and ZGN-1258. In our Phase 1 clinical trial ofZGN-1061, the most common adverse events reported were mild gastrointestinal issues (comparable between ZGN-1061 and placebo groups),headache and procedural-related irritation. In addition, data from the interim analysis of the Phase 2 clinical trial of ZGN-1061 demonstrated anincrease in A1C in some treatment groups between 8 weeks and 12 weeks, and it is unknown whether this effect would continue or worsen during theremainder of this clinical trial.Further, if ZGN-1061 or ZGN-1258 receive marketing approval and we or others identify undesirable side effects caused by the product (or anyother similar product) after the 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 throughlabeling or other means; • regulatory authorities may require the addition of labeling statements, such as a “black box” 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 labelingof the product; • we may decide to remove the product 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.Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantiallyincrease the costs of commercializing our product candidates and significantly impact our ability to successfully commercialize our product candidatesand generate revenues. 33 Table of ContentsFailures or delays in the commencement or completion of our planned clinical trials of ZGN-1061 or ZGN-1258 could result in increased costs to usand could delay, prevent or limit our ability to generate revenue and continue our business.ZGN-1061 has completed Phase 1 clinical development in the Netherlands and is in Phase 2 clinical development in Australia and New Zealandand will require substantial further clinical development before we can submit an NDA to the FDA or an MAA to the EMA for its marketing approval.ZGN-1258 is still in nonclinical development, and additional nonclinical work must be completed prior to filing the IND application with the FDA.Despite the guidance we may receive from the FDA, the EMA, or other applicable regulatory authorities including Australia and New Zealand,any of these regulatory authorities can change their positions on the acceptability of our clinical trial designs or the clinical endpoints selected, whichmay require us to complete additional clinical trials or impose stricter approval conditions than we currently expect. Successful completion of suchclinical trials is a prerequisite to submitting an NDA to the FDA and an MAA to the EMA and, consequently, the ultimate approval and commercialmarketing of ZGN-1061 or ZGN-1258. We do not know whether any clinical trials for ZGN-1061 or ZGN-1258 will begin or be completed on schedule,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 or Australia and New Zealand may deny permission to begin or continue clinical trials,including for certain indications, we want to conduct; • delays in regulatory filings or receiving regulatory authorizations of IND applications, or clinical trial authorization applications, or CTAs,that may be required; • unfavorable results from our nonclinical studies, thus the FDA, the EMA or the applicable regulatory authorities in Australia or NewZealand, may require additional nonclinical and /or nonclinical studies; • delays in reaching or failing to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which canbe subject to extensive 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 themanufacturing of sufficient 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 siteor sites in the United States, the European Union, Australia or New Zealand; • challenges in recruiting and enrolling patients to participate in clinical trials, including the size and nature of the patient population, theproximity of patients to clinical trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial protocol, the availability ofapproved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications; • difficulties in retaining or recruiting clinical investigators and/or patients in our ongoing or future clinical trials; • difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trial, lack ofefficacy, side effects, screening and monitoring measures, personal issues or loss of interest; • severe or unexpected drug-related side effects experienced by patients in a clinical trial, including side effects previously identified in ourprevious clinical trials for beloranib; • the FDA, the EMA, or the applicable regulatory authorities in Australia and New Zealand may disagree with our clinical trial designs, ourinterpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on thedesign for our clinical trials; and 34 Table of Contents • reports from nonclinical, nonclinical or clinical testing of other weight loss therapies that raise safety or efficacy concerns.Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may besuspended or terminated by us, the FDA, other regulatory authorities, the IRBs or ethics committees, at the sites where the IRBs or ethics committeesare overseeing a clinical trial, a data monitoring committee, or DMC, overseeing the clinical trial at issue or other regulatory authorities due to anumber 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, the EMA, or the applicable regulatory authorities in Australia and NewZealand that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a partial clinicalhold or a full clinical hold; • unforeseen safety issues, including any that could be identified in our nonclinical or nonclinical studies, adverse side effects or lack ofeffectiveness; • 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, Australia or New Zealand or unanticipated events during our clinicaltrials of ZGN-1061 or ZGN-1258, may occur, which may result in changes to clinical trial protocols or additional clinical trial requirements, whichcould result in increased costs to us and could delay our development timeline.Changes in regulatory requirements, FDA guidance or guidance from EMA or unanticipated events during our clinical trials may force us toadjust our clinical program. The FDA, the EMA, or the applicable regulatory authorities in Australia and New Zealand may impose additional clinicaltrial and/or nonclinical study requirements. For instance, the FDA issued draft guidance on developing products for weight management inFebruary 2007 and issued draft guidance on developing products for the treatment of diabetes in February 2008 but these guidance documents may berevised at any time. In December 2008, FDA established guidance on evaluating cardiovascular risk of new therapies for the treatment of type 2diabetes. Amendments to our clinical trial protocols would require resubmission to the FDA, the EMA, or the applicable regulatory authorities inAustralia and New Zealand as well as IRBs and ethics committees for review and approval, which may adversely impact the cost, timing or successfulcompletion of a clinical trial. If we experience delays completing, or if we terminate, any of our clinical trials, or if we are required to conductadditional clinical trials and/or nonclinical studies, the commercial prospects for ZGN-1061 or ZGN-1258 may be harmed and our ability to generateproduct revenue will be delayed.We rely, and expect that we will continue to rely, on third parties to conduct any future clinical trials for ZGN-1061 and ZGN-1258. If these thirdparties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to develop and obtain regulatoryapproval for or commercialize ZGN-1061 or ZGN-1258, and our business 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 onthese parties for execution of clinical trials for ZGN-1061 and will continue to rely on these parties for clinical trials for ZGN-1258, but we only controlcertain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these clinical trials and themanagement of data developed through the clinical trials than would be the case if we were relying 35 Table of Contentsentirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties incoordinating activities. Outside parties may: • 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 tounexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted inaccordance with the applicable protocol, legal and regulatory requirements and scientific standards, and our reliance on CROs does not relieve us ofour regulatory responsibilities. We and our CROs are required to comply with requirements for Good Clinical Practice, or GCPs, which are legalrequirements enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreignregulatory authorities for any products in clinical development. The FDA enforces these GCP regulations through periodic inspections of clinical trialsponsors, principal investigators and clinical trial sites, IRBs, and other vendors that may be involved in the clinical development of new products. Ifwe or our investigators or CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable andthe FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications.We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with GCPs. In addition, our clinical trialsmust be conducted with products produced under current Good Manufacturing Practices, or cGMPs’ regulations, to assure the identity, strength,quality, and purity of our drug product candidates being used in the clinical trials, as well as the to-be-marketed formulation and product. Our failure orthe failure of our CROs and/or contract manufacturing organizations, or CMOs, to comply with these regulations may require us to repeat clinical trials,which would delay the regulatory approval process and could also subject us to enforcement action, up to and including, civil and criminal penalties.Although we design our clinical trials, investigators and CROs conduct all of the clinical trials. As a result, many important aspects of our drugdevelopment programs are outside of our direct control. In addition, the investigators or CROs may not perform all of their obligations underarrangements with us or in compliance with regulatory requirements, but we remain responsible and are subject to enforcement action that may includecivil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If theinvestigators or CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us, or fail to comply with regulatoryrequirements, the development and commercialization of ZGN-1061 or ZGN-1258 may be delayed or our development program materially andirreversibly harmed. We cannot control the amount and timing of resources these investigators or CROs devote to our program, ZGN-1061, or willdevote to ZGN-1258. If we are unable to rely on clinical data collected by our investigators or CROs, we could be required to repeat, extend theduration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greaterexpenditures.If any of our relationships with these third-party investigators or CROs terminate, we may not be able to enter into arrangements with alternativeinvestigators or CROs in a timely manner, or at all. If investigators or CROs do not successfully carry out their contractual duties or obligations or meetexpected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhereto our clinical protocols, regulatory requirements or for other reasons, any such clinical trials may be extended, delayed or terminated, and we may notbe able to obtain regulatory approval for or successfully commercialize ZGN-1061 or ZGN-1258. As a result, our financial results and the commercialprospects for ZGN-1061 or ZGN-1258 in the subject indications would be harmed, our costs could increase and our ability to generate revenue couldbe delayed. 36 Table of ContentsThe number of patients suffering from PWS is small and has not been established with precision. If the actual number of patients with this conditionis smaller than we estimate or if any approval that we obtain is based on a narrower definition of this patient population, our revenue and ability toachieve profitability for ZGN-1258 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 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 to1 in 50,000. If the actual number of patients with PWS is lower than we believe or if any approval that we obtain is based on a narrower definition ofthese patient populations, than the potential market for ZGN-1258 for these indications will be smaller than we anticipate. If our IND goes into effect,our inability to enroll a sufficient number of patients for our clinical trials could result in significant delays or may require us to abandon one or moreclinical trials altogether. Enrollment delays in our clinical trials may result in increased development costs for ZGN-1258, delay or halt thedevelopment of and approval processes for our product candidates and jeopardize our ability to achieve our clinical development timeline and goals,including the dates by which we will commence, complete and receive results from clinical trials. Enrollment delays in our clinical trials may alsojeopardize our ability to commence sales of and generate revenues from our product candidates, which could cause the value of our company todecline and limit our ability to obtain additional financing, if needed.We rely completely on third-party suppliers to manufacture our clinical drug supplies for ZGN-1061 and ZGN-1258, and to the extent we elect tocommercialize ZGN-1061 or ZGN-1258 on our own, we intend to rely on third parties to produce commercial supplies of such products, andnonclinical, 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 supplyof ZGN-1061, ZGN-1258, or any future product candidates, for use in the conduct of our nonclinical studies and clinical trials, and we lack the internalresources and the capability to manufacture any product candidates on a clinical or commercial scale. The CMOs used to manufacture the active drugsubstance and final drug product must be approved by our quality assurance unit and inspected by the FDA and other comparable foreign regulatoryagencies.We rely on our CMOs to comply with cGMPs for manufacture of raw materials, active drug substance and finished drug products. If our CMOscannot successfully manufacture material that conforms to our specifications and the regulatory requirements of the FDA or applicable foreignregulatory agencies, the CMOs will not be able to secure and/or maintain regulatory approval for their manufacturing facilities or regulatory agenciesmay find deficiencies with their facilities and refuse to approve our marketing applications. While we manage our quality expectations through anaudit program for our vendors and suppliers, we have no direct control over our CMOs’ ability to maintain adequate quality control, quality assuranceand qualified personnel. Furthermore, our CMOs are engaged with third party vendors to supply and/or manufacture starting materials or componentsfor them, which exposes our CMOs to regulatory risks for the production of such materials and components. As a result, failure to satisfy the regulatoryrequirements for the production of those materials and components may affect the regulatory clearance of our CMOs’ facilities generally. If the FDA oran applicable foreign regulatory agency finds deficiencies with or does not approve these facilities for the manufacture of our product candidates or ifit withdraws its approval in the future, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop,obtain regulatory approval for or market our product candidates.We rely completely on third-party suppliers to manufacture our nonclinical and clinical drug supplies for ZGN-1061 and our nonclinical drugsupplies and future clinical drug supplies for ZGN-1258. Currently each batch of ZGN-1061 and ZGN-1258 is individually contracted under a workorder, which is governed by a quality and service agreement. The current drug substance manufacturing process will support nonclinical studies andearly clinical trials and will be further optimized to support advanced clinical development and 37 Table of Contentscommercialization. Current drug substance, including key starting material, in inventory, is expected to support Phase 2 clinical trials. A newformulation with longer shelf life has been developed and manufactured to support Phase 2 clinical development for ZGN-1061.Even if we receive marketing approval for a product candidate in the United States, we may never receive regulatory approval to market suchproduct candidate outside of the United States.We may pursue marketing approval for certain of our product candidates in the United States, the European Union and in other countriesworldwide. In order to market any product outside of the United States, we must establish and comply with the numerous and varying safety, efficacyand other regulatory requirements of other countries, including potential additional clinical trials and/or nonclinical studies. Approval procedures varyamong countries and can involve additional product candidate testing and additional administrative review periods. The time required to obtainapprovals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries mayimplicate all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside ofthe United States, products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval canresult in substantial delays in bringing products to market in such countries. In addition, on March 20, 2017, the United Kingdom government startedthe process to leave the European Union by April 2019, or Brexit. The effects of Brexit will depend on any agreements the United Kingdom makes toretain access to European Union markets either during a transitional period or more permanently. Brexit could lead to legal uncertainty and potentiallydivergent national laws and regulation as the United Kingdom determines which European Union laws to replace or replicate. Marketing approval inone country does not necessarily ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may havea negative effect on the regulatory process or commercial activities in others. Failure to obtain marketing approval in other countries or any delay orother setback in obtaining such approval would impair our ability to market a product candidate in such foreign markets. Any such impairment wouldreduce 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 a product candidate, it may not achieve broad market acceptance, which would limit the revenue that wegenerate from its sales.The commercial success of a product candidate, if developed and approved for marketing by the FDA or EMA or other applicable regulatoryauthorities, will depend upon the awareness and acceptance of our product candidates among the medical community, including physicians, patients,advocacy groups and healthcare payors. Market acceptance of a product candidate, if approved, will depend on a number of factors, including, amongothers: • the relative convenience and ease of subcutaneous injections as the necessary method of administration of our product candidates; • the prevalence and severity of any adverse side effects associated with a product candidate; • limitations or warnings contained in the labeling approved for a product candidate by the FDA, EMA, or other regulatory authorities, suchas a “black box” warning; • availability of alternative treatments, including a number of competitive type 2 diabetes therapies already approved or expected to becommercially launched in 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; 38 Table of Contents • the effectiveness of our sales and marketing strategies; • our ability to increase awareness of a product candidate 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 ourproposed REMS or may impose additional requirements that limit the promotion, advertising, distribution or sales of our productcandidates.If a product candidate is approved but does not achieve an adequate level of acceptance by patients, advocacy groups, physicians and payors, wemay not generate sufficient revenue from a product candidate to become or remain profitable. Before granting reimbursement approval, healthcarepayors may require us to demonstrate that, in addition to treating type 2 diabetes in patients, a product candidate also provides incremental healthbenefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of a product candidate may requiresignificant resources and may never be successful.If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell a product candidate, wemay not be able to generate any revenue.We do not currently have an established infrastructure for the sales, marketing and distribution of pharmaceutical products. In order to market aproduct candidate, if approved by the FDA or any other regulatory body, we must build our sales, marketing, managerial and other non-technicalcapabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distributioncapabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results ofoperations, financial condition and prospects will be materially adversely affected.Even if we receive marketing approval for a product candidate, we may still face future development and regulatory difficulties.Even if we receive marketing approval for a product candidate, regulatory authorities may still impose significant restrictions on our productcandidates’ indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. a product candidate will also besubject to ongoing FDA and EMA requirements governing the labeling, packaging, storage and promotion of the product and recordkeeping andsubmission of safety and other post-market information. The FDA has significant post-market authority, including, for example, the authority to requirelabeling changes based on new safety information and to require post-market studies or clinical trials to evaluate serious safety risks related to the useof 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 FDAmay lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the saleof approved products, all of which could lead to lower sales volume and revenue. Additionally, the FDA may require a PMS and/or PMRs, that couldrepresent 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 regulatoryauthorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with a product candidate, such as adverseevents of unanticipated severity or frequency, or problems with the facility where a product candidate is manufactured, a regulatory agency mayimpose restrictions on a product candidate, the manufacturer or us, including requiring withdrawal of a product candidate from the market orsuspension of manufacturing. If we or the manufacturing facilities for a product candidate fail to comply with applicable regulatory requirements, aregulatory agency may, among other things: • issue warning letters or untitled letters; 39 Table of Contents • 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 thesale of ZGN-1061 or ZGN-1258.The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We havecompetitors in a number of jurisdictions, many of which have substantially greater name recognition, commercial infrastructures and financial,technical and personnel resources than we have. Established competitors may invest heavily to quickly discover and develop novel compounds thatcould make ZGN-1061 or ZGN-1258 obsolete or uneconomical. Any new product that competes with an approved product may need to demonstratecompelling advantages in efficacy, convenience, tolerability and safety to be commercially successful. Other competitive factors, including genericcompetition, could force us to lower prices or could result in reduced sales. In addition, new products developed by others could emerge as competitorsto ZGN-1061 or ZGN-1258. If we are not able to compete effectively against our current and future competitors, our business will not grow and ourfinancial condition and operations will suffer.Our future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens andother risks and uncertainties.Our future profitability will depend, in part, on our ability to commercialize a product candidate in foreign markets for which we may rely oncollaborations with third parties. If we commercialize a product candidate in foreign markets, we would be subject to additional risks and uncertainties,including: • our customers’ ability to obtain reimbursement for a product candidate 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.Foreign sales of a product candidate could also be adversely affected by the imposition of governmental controls, political and economicinstability, trade restrictions and changes in tariffs. 40 Table of ContentsWe are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputationalharm and diminished profits and future earnings.Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of ZGN-1061 or ZGN-1258, ifapproved. Our future arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws andregulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute ZGN-1061 orZGN-1258, if we obtain marketing approval. In addition, we may be subject to patient privacy regulation by both the federal government and the statesin which we conduct our business. Restrictions under applicable federal and state healthcare laws and regulations include the following: • The federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving orpaying remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase,order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare andMedicaid. • The federal false claims laws impose criminal and civil penalties, including those from civil whistleblower or qui tam actions pursuant tothe federal False Claims Act, against individuals or entities for knowingly presenting, or causing to be presented, to the federalgovernment, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to paymoney to the federal government. • The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economicand Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and alsoimposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission ofindividually identifiable health information. • The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false 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,require manufacturers of drugs, devices, biologics, and medical supplies to report to the Department of Health and Human Servicesinformation related to physician payments and other transfers of value and physician ownership and investment interests. • HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and their respectiveimplementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghousesas well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiablehealth information, relating to the privacy, security and transmission of individually identifiable health information. • Federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentiallyharm consumers. • Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales ormarketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, includingprivate insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntarycompliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drugmanufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drugpricing. 41 Table of ContentsEnsuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It ispossible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case lawinvolving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted byour sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject tosignificant civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicareand Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect todo business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, includingexclusions from government 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 ZGN-1061or ZGN-1258, if approved. If we receive marketing approval for ZGN-1061 or ZGN-1258, physicians may prescribe our product candidates to theirpatients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject tosignificant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and hasenjoined several companies from engaging in off-label promotion and required that they enter into corporate integrity agreements with the Office ofInspector 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 ofZGN-1061 or ZGN-1258, if approved, we could become subject to significant liability, which would materially adversely affect our business andfinancial condition.Even if approved, reimbursement policies could limit our ability to sell product candidates that we elect to sell on our own.If approved by regulatory authorities, market acceptance and sales of product candidates that we elect to sell on our own will depend onreimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private healthinsurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications.Cost containment is a primary concern in the U.S. healthcare industry and elsewhere. Government authorities and these third-party payors haveattempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursementwill be available for product candidates that we elect to sell on our own and, if reimbursement is available, the level of such reimbursement.Reimbursement may impact the demand for, or the price of, product candidates that we elect to sell on our own. If reimbursement is not available or isavailable only at limited levels, we may not be able to successfully commercialize product candidates that we elect to sell on our own.In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strictgovernmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt ofregulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we maybe required to conduct a clinical trial that compares the cost-effectiveness of product candidates that we elect to sell on our own with other availabletherapies. If reimbursement for product candidates that we elect to sell on our own is unavailable in any country in which we seek reimbursement, if itis limited in scope or amount, if it is conditioned upon our completion of additional clinical trials, or if pricing is set at unsatisfactory levels, ouroperating results could be materially adversely affected. 42 Table of ContentsRecently enacted and future legislation may increase the difficulty and cost for us to obtain regulatory approval of and commercialize our drugcandidates and affect the prices we may obtain.The ACA has a significant impact on the health care industry. The ACA is a sweeping law intended to broaden access to health insurance, reduceor constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare andhealth insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The new presidentialadministration has indicated that enacting changes to the ACA is a legislative priority and has alternatively discussed repealing and replacing theACA. While Congress has not passed repeal legislation to date, the 2017 Tax Reform Act includes a provision repealing the individual mandate,effective January 1, 2019. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities andresponsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose afiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers, or manufacturers ofpharmaceuticals or medical devices. On October 13, 2017, President Trump signed an Executive Order terminating the cost-sharing subsidies thatreimburse insurers under the ACA. In addition, CMS has recently proposed regulations that would give states greater flexibility in setting benchmarksfor insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACAfor plans sold through these marketplaces. Congress will likely consider other legislation to replace elements of the ACA. We do not know at this timewhat implications these changes and other, proposed changes, if enacted, would have on the ACA’s current requirements or on our future business.Changes to the ACA or other existing health care regulations could significantly impact our business and the pharmaceutical industry.We may seek to obtain orphan drug designation for certain of our product candidates, and we may be unsuccessful.As part of our business strategy, we may seek to obtain orphan drug designation for certain of our product candidates in the United States and theEuropean Union. We may be unsuccessful in obtaining orphan drug designation, and if we do, we may not receive orphan drug exclusivity for theseproducts. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or conditionreceives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approvinganother application, including a full NDA to market the same drug for the same orphan indication, except in very limited circumstances, includingwhen the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient 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 the same use as the drug in question. Adesignated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it receivedorphan designation. 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 raredisease or condition.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 of market exclusivity is granted following drug product approval, meaning that another application for marketing authorization of a latersimilar medicinal product for the same therapeutic indication will generally not be approved in the European Union. This period may be reduced to sixyears if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable to not justifymaintenance of market exclusivity. 43 Table of ContentsOur development programs for our product candidates, which are primarily related to ZGN-1061 and ZGN-1258, may require substantial financialresources and may ultimately be unsuccessful.Our lead product candidate ZGN-1061 has completed Phase 1 clinical development and is currently in Phase 2 clinical development, and thereare a number of FDA and certain European regulatory requirements that we must satisfy before we can commence late-stage clinical trials of ZGN-1061.Satisfaction of these requirements will entail substantial time, effort and financial resources. We may never satisfy these requirements. ZGN-1258 is stillin nonclinical development. We believe that our cash, cash equivalents and marketable securities will be sufficient to fund operations for a period of atleast one year from the issuance date of this Annual Report, but we will need to raise more funds to continue development and commercialization ofZGN-1061, ZGN-1258 and our other product candidates, which may not be easily available. Furthermore, any time, effort and financial resources weexpend on our other early-stage development programs may adversely affect our ability to continue development and commercialization of ZGN-1061and ZGN-1258, and we may never commence clinical trials of such development programs despite expending significant resources in pursuit of theirdevelopment. If we do commence clinical trials of our other potential product candidates, such product candidates may never be approved by the FDAor 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 ZGN-1061, ZGN-1258,or future product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results ofoperations, 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 inthe United States and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietarytechnology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm ourbusiness and ability to achieve profitability. Our owned patent application relates to compositions of matter and methods of use of ZGN-1061.As of March 1, 2018, we own one issued U.S patent, two pending U.S. patent applications, with pending foreign counterpart patent applications,one pending Patent Cooperation Treaty, or PCT, patent application, as well as two pending U.S. provisional patent applications that relate toZGN-1061.As of March 1, 2018, we own two pending U.S. patent applications, and related worldwide patent applications, that relate to ZGN-1258.As of March 1, 2018, we own 19 issued U.S. patents, and 9 pending U.S. patent applications with pending foreign counterpart applications, all ofwhich relate to our internal efforts to discover novel MetAP2 inhibitors.We cannot provide any assurances that any of our pending patent applications that mature into issued patents will include claims with a scopesufficient to protect ZGN-1061 and our other product candidates. Other parties have developed technologies that may be related or competitive to ourapproach 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 patentpositions of biotechnology 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 bechallenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to interference proceedings,ex parte reexamination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected toopposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent offices. These 44 Table of Contentsproceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims ofthe patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own or exclusively license may notprovide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving thepatent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize ZGN-1061 and our other productcandidates.Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and itmay not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may alsobe able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. Thelaws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encountersignificant problems in protecting our proprietary rights in these countries. If these developments were to occur, they could have a material adverseeffect on our potential future 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 thecomponents that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s orpotential competitor’s product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consumingand would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiateand the damages or other remedies awarded if we were to prevail may not be commercially meaningful.In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable, or interpretednarrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of ourpatents are invalid or otherwise unenforceable. If any of our patents covering ZGN-1061 are invalidated or found unenforceable, our financial positionand results of operations would be materially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third partiescovered ZGN-1061, our financial position and results 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 ZGN-1061,ZGN-1258 or any other products or product candidates; • any of our pending patent applications will issue as patents; • we will be able to successfully develop and commercialize ZGN-1061 or ZGN-1258, 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 anycompetitive advantages 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. 45 Table of ContentsWe rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitiveposition, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also haveagreements with our employees and selected consultants that obligate them to assign their inventions to us and have non-compete agreements withsome, 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 aparty to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of theseagreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches orviolations. Further, our trade secrets could otherwise become known or be independently 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 fromcommercializing or increase the costs of commercializing ZGN-1061 or ZGN-1258, if approved.Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. Wecannot assure you 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 mayallege that ZGN-1061, ZGN-1258, or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we areemploying their proprietary technology without authorization. Patent and other types of intellectual property litigation can involve complex factualand legal questions, and their outcome is uncertain. Any claim relating to intellectual property infringement that is successfully asserted against usmay require us to pay substantial damages, including treble damages and attorneys’ fees if we are found to be willfully infringing another party’spatents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. Inaddition, if any such claim were successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing,manufacturing, selling or otherwise commercializing ZGN-1061 or ZGN-1258.Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing theseproceedings, 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 toseek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly andtime consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation orclaims could force us to do one or more of the following: • cease developing, selling or otherwise commercializing ZGN-1061; • cease preparations or developing ZGN-1258; • 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 the trademarks or trade names of our product candidates to avoid infringing theintellectual property rights of third parties, which may not be possible 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 andprospects. 46 Table of ContentsWe 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 otherintellectual property. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail indefending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of,or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful indefending against such claims, litigation could result in 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 otherrequirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with theserequirements.The U.S. Patent and Trademark Office, or U.S. PTO, and various foreign governmental patent agencies require compliance with a number ofprocedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result inabandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such anevent, competitors might be able to enter the market 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 andunsuccessful.Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to fileinfringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of oursor our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on thegrounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more ofour patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk 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 ourpatents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt tolicense rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commerciallyreasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract ourmanagement and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights,particularly in countries where the laws may not protect those rights as fully 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 someof our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of theresults of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, itcould have a material adverse effect 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, thedefendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States,defendant counterclaims alleging 47 Table of Contentsinvalidity 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 someoneconnected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement, during prosecution. Thirdparties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Suchmechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Suchproceedings could result in revocation or amendment of our patents in such a way that they no longer cover our product candidates or competitiveproducts. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannotbe certain that there is no invalidating prior act, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevailon a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our productcandidates. 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 ourintellectual property 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 prohibitivelyexpensive, and our intellectual property rights in some countries outside the United States could be less extensive than those in the United States. Inaddition, the laws of some foreign 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 to prevent third parties from practicing our inventions in all countries outside the United States, or from selling orimporting products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies injurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products toterritories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our productsand our patents or other intellectual property rights may not 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. Thelegal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual propertyprotection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketingof competing products in violation of our proprietary rights generally. For example, an April 2014 report from the Office of the United States TradeRepresentative identified a number of countries, including India and China, where challenges to the procurement and enforcement of patent rightshave been reported. Several countries, including India and China, have been listed in the report every year since 1989. Proceedings to enforce ourpatent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could putour patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third partiesto assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not becommercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain asignificant commercial advantage from the intellectual property that we develop or license.We are dependent on licensed intellectual property for certain early-stage product candidates. If we were to lose our rights to licensed intellectualproperty, we may not be able to continue developing or commercializing such product candidates, if approved.We have an exclusive license with Children’s Medical Center Corporation, pursuant to which we exclusively licensed certain patent rightsrelating to decreasing the growth of fat tissue, on a worldwide basis. We may enter into additional licenses to third-party intellectual property that arenecessary or useful to our business. 48 Table of ContentsCurrent or future licensors may also allege that we have breached our license agreement and may accordingly seek to terminate our license with them.In addition, current or future licensors may decide to terminate our license at will. If successful, this could result in our loss of the right to use thelicensed intellectual property, which could materially adversely affect our ability to develop and commercialize a product candidate or product, ifapproved, as well as harm our competitive business position and our business prospects.We have not yet registered trademarks for a commercial trade name for ZGN-1061 or ZGN-1258 and failure to secure such registrations couldadversely affect our business.We have not yet registered trademarks for a commercial trade name for ZGN-1061 or ZGN-1258. Any future trademark applications may berejected during trademark registration proceedings. Although we would be given an opportunity to respond to those rejections, we may be unable toovercome such rejections. In addition, in the U.S. PTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunityto oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against ourtrademarks, and our trademarks may not survive such proceedings. Moreover, any name we propose to use with our product candidates in the UnitedStates must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts areview of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of ourproposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable substitute namethat would qualify under applicable trademark laws, not infringe 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 andobtaining data exclusivity for ZGN-1061, our business may be materially harmed.Depending upon the timing, duration and specifics of development and FDA marketing approval of ZGN-1061 or ZGN-1258, one or more of ourU.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred toas the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patentterm lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example,failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicablerequirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtainpatent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competingproducts following our patent expiration, and our ability to generate revenues could be materially adversely affected.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 reformlegislation. Further, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection availablein certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our abilityto obtain future patents, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisionsby the U.S. Congress, the federal courts and the U.S. PTO, the laws and regulations governing patents could change in unpredictable ways that wouldweaken our ability to obtain new patents or to enforce our existing patents or future patents. 49 Table of ContentsWe 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 potentialcompetitors. Although we are not aware of any claims currently pending against us, we may be subject to claims that these employees or we haveinadvertently or otherwise used or disclosed trade secrets or other proprietary information of the former employers of our employees. Litigation may benecessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and bea distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rightsor personnel. A loss of key personnel or their work product could hamper or prevent our ability to develop and commercialize ZGN-1061 or ZGN-1258and other product candidates, which would materially adversely affect our business, financial condition and results of operations.General Company-Related RisksIn 2016, we reduced the size of our organization, and we may encounter difficulties in managing this development and restructuring, which coulddisrupt our operations. In addition, we may not achieve anticipated benefits and savings from the reduction.In July 2016, our board of directors approved the suspension of further development of beloranib and a restructuring plan, pursuant to which ourworkforce was reduced by approximately 31% as of December 2016. The workforce reduction resulted in the loss of longer-term employees, the loss ofinstitutional knowledge and expertise and the reallocation and combination of certain roles and responsibilities across the organization, all of whichcould adversely affect our operations. Given the complexity of our business, we must continue to implement and improve our managerial, operationaland financial systems, manage our facilities and continue to recruit and retain qualified personnel. This will be made more challenging given theworkforce reduction described above. As a result, our management may need to divert a disproportionate amount of its attention away from ourday-to-day activities, and devote a substantial amount of time to managing these activities. Further, the restructuring and possible additional costcontainment measures may yield unintended consequences, such as attrition beyond our intended workforce reduction and reduced employeemorale. In addition, we may not achieve anticipated benefits from the workforce reduction. Due to our limited resources, we may not be able toeffectively manage our operations or recruit and retain qualified personnel, which may result in weaknesses in our infrastructure and operations, risksthat we may not be able to comply with legal and regulatory requirements, and loss of employees and reduced productivity among remainingemployees. For example, the workforce reduction may negatively impact our clinical and regulatory functions, which would have a negative impact onour ability to successfully develop, and ultimately, commercialize ZGN-1061 or ZGN-1258. If our management is unable to effectively manage thistransition and workforce reduction and additional cost containment measures, our expenses may be more than expected and we may not be able toimplement our business strategy. As a result, our future financial performance and our ability to commercialize ZGN-1061 or ZGN-1258 successfullywould be negatively affected.Our future success depends on our ability to retain our executive officers, and particularly our current Chief Executive Officer and President andChief Scientific Officer, and to attract, retain and motivate qualified personnel.We are highly dependent on Mr. Jeffrey Hatfield, our Chief Executive Officer and Dr. Thomas E. Hughes, our President and Chief ScientificOfficer. We have entered into a severance and change in control agreement with each of Mr. Hatfield and Dr. Hughes, but either executive mayterminate his employment with us at any time. Although we do not have any reason to believe that we will lose the services of Mr. Hatfield orDr. Hughes in the foreseeable future, the loss of either executive’s services might impede the achievement of our research, development andcommercialization objectives. We also do not have any key-man life insurance on Mr. Hatfield or Dr. Hughes. 50 Table of ContentsOur success also depends upon the principal members of our executive, medical and development teams. We have entered into a severance andchange in control agreement with our executive officers and department vice president level employees, but they may terminate their employment withus at any time. The loss of the services of any of these persons might impede the achievement of our development and commercialization objectives.With any change in leadership, there is also a risk to retention of employees, as well as the potential for disruption to business operations,initiatives, plans and strategies.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 consultingor advisory contracts with other entities that may limit their availability to us and may not be subject to our standard non-compete agreements.Recruiting and retaining qualified scientific personnel and sales and marketing personnel will also be critical to our success. We may not be able toattract and retain these personnel on acceptable terms given the workforce reduction and competition among numerous pharmaceutical andbiotechnology companies for similar personnel. We also experience competition for the hiring of scientific personnel from universities and researchinstitutions. Failure to succeed in clinical trials may make it more challenging to recruit and retain qualified scientific personnel.Our employees may engage in misconduct or other improper activities, including violating applicable regulatory standards and requirements orengaging in insider 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 withthe regulations of the FDA and applicable non-U.S. regulators, provide accurate information to the FDA and applicable non-U.S. regulators, complywith healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or discloseunauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws andregulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit awide range of pricing, discounting, marketing and promotion, 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 couldresult in regulatory sanctions and serious harm to our reputation. We have adopted an insider trading policy and a code of conduct, but it is not alwayspossible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may be ineffective in controllingunknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure tocomply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting ourrights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.We face potential product liability exposure, and, if claims are brought against us, we may incur substantial liability.The use of ZGN-1061 and ZGN-1258 in clinical trials and the sale of ZGN-1061 and ZGN-1258, if developed and approved, exposes us to therisk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers or others selling or otherwisecoming into contact with ZGN-1061 or ZGN-1258. For example, we may be sued if any product we develop allegedly causes injury or death or is foundto be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations ofdefects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, including as a result of interactions with alcohol orother drugs, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we becomesubject to product liability claims and cannot successfully defend ourselves against them, we could 51 Table of Contentsincur substantial liabilities. In addition, 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 ZGN-1061, ZGN-1258, 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 ZGN-1061 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, ourinsurance coverage may be insufficient to reimburse us for any expenses or losses we may suffer. Moreover, in the future, we may not be able tomaintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomesincreasingly expensive. If and when we obtain marketing approval for ZGN-1061 or ZGN-1258, we intend to expand our insurance coverage to includethe sale of commercial products; however, we may not be able to obtain this product liability insurance on commercially reasonable terms. Largejudgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation orother proceedings, even if resolved in our favor, could be substantial, particularly in light of the size of our business and financial resources. A productliability claim or series of claims brought against us could cause our stock price to decline and, if we are unsuccessful in defending such a claim orclaims and the resulting judgments exceed our insurance coverage, our financial condition, business and prospects could be materially adverselyaffected.We must maintain effective internal control over financial reporting, and if we are unable to do so, the accuracy and timeliness of our financialreporting may be 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 havetaken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerginggrowth 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 andfinancial condition. In addition, as a public company, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires, among other things, thatwe assess the effectiveness of our disclosure controls and procedures quarterly and the effectiveness of our internal control over financial reporting atthe 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 toSection 404 of the Sarbanes-Oxley Act are complex and require significant documentation, testing and possible remediation. These stringent standardsrequire that our audit committee be advised and regularly updated on management’s review of internal control over financial reporting. Ourmanagement may not be able to effectively and timely implement controls and procedures that adequately 52 Table of Contentsrespond to the increased regulatory compliance and reporting requirements that are applicable to us as a public company. If we fail to staff ouraccounting and finance function adequately or maintain internal control over financial reporting adequate to meet the demands that will be placedupon us as a public company, including the requirements of the Sarbanes-Oxley Act, our business and reputation may be harmed and our stock pricemay decline. Furthermore, investor perceptions of us may be adversely affected, which could cause a decline in the market price of our common stock.Comprehensive Tax Reform Legislation Could Adversely Affect Our Business And Financial Condition.On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act,” or the TCJA, that significantly reforms the InternalRevenue Code of 1986, as amended, or the Code. The TCJA, among other things, contains significant changes to corporate taxation, includingreduction of the corporate tax rate, limitation of the tax deduction for interest expense, limitation of the deduction for net operating losses andelimination of net operating loss carrybacks and modifying or repealing many business deductions and credits (including reducing the business taxcredit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”).Our net deferred tax assets and liabilities were revalued at the newly enacted U.S. corporate rate. We continue to examine the impact this tax reformlegislation may have on our business. The overall impact of the TCJA is uncertain and our business and financial condition could be adverselyaffected.Our ability to use our net operating loss carryforwards and certain tax credit carryforwards may be subject to limitation.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 orour earned tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2017, we had net operating loss carryforwardsfor federal and state income tax purposes of $54.0 million and $39.6 million, respectively, which begin to expire in 2026 and 2030, respectively. As ofDecember 31, 2017, we also had available tax credit carryforwards for federal and state income tax purposes of $14.8 million and $2.4 million,respectively, which begin to expire in 2026 and 2021, respectively. Under Section 382 of the Code, changes in our ownership may limit the amount ofour net operating loss carryforwards and tax credit carryforwards that could be utilized annually to offset our future taxable income, if any. Thislimitation would generally apply in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Anysuch limitation may significantly reduce our ability to utilize our net operating loss carryforwards and tax credit carryforwards before they expire. Ourfollow-on public offering, initial public offering, or IPO, private placements and other transactions that have occurred since our inception, may triggersuch an ownership change pursuant to Section 382. Any such limitation, whether as the result of our follow-on public offering, IPO, prior privateplacements, sales of our common stock by our existing stockholders or additional sales of our common stock by us, could have a material adverseeffect on our results of operations in future years. We have not completed a study to assess whether an ownership change for purposes of Section 382has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated withsuch study. The reduction of the corporate tax rate under TCJA may cause a reduction in the economic benefit of our net operating loss carryforwardsand other deferred tax assets available to us. Under the TCJA, net operating losses generated after December 31, 2017 will not be subject to expiration.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 severeor prolonged economic downturn could result in a variety of risks to our business, including, weakened demand for our product candidates and ourability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly 53 Table of Contentsresulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and wecannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely 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 couldresult in a material disruption of our ZGN-1061, ZGN-1258, or other product candidate development programs.Despite the implementation of security measures, our internal computer systems and those of our third-party CROs and other contractors andconsultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication andelectrical failures. While we have not experienced any such system failure or accident, if such an event were to occur and cause interruptions in ouroperations, it could result in a material disruption of our programs. For example, the loss of clinical trial data for ZGN-1061 could result in delays inour regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breachresults in a loss of or damage to our data or applications or other data or applications relating to our technology or product candidates, or inappropriatedisclosure of confidential or proprietary information, we could incur liabilities and the further development of ZGN-1061 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 MetAP2 platform.Although ZGN-1061 is currently in clinical development, and we have begun preparations for filing an IND for ZGN-1258, our research programs mayfail to identify other potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful inidentifying potential product candidates or our potential product candidates may be shown to have harmful side effects or may have othercharacteristics 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 materialadverse effect on our business and could potentially cause us to cease operations. Research programs to identify new product candidates requiresubstantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates thatultimately prove to be unsuccessful.We may seek to establish collaborations and, if we are not able to establish them on commercially reasonable terms, we may have to alter ourdevelopment and commercialization plans or expand our internal efforts and growth.Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fundexpenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the developmentand potential commercialization of those product candidates in some or all markets.We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend,among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and theproposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approvalby the FDA or similar regulatory authorities outside the United States, the potential market for the applicable product candidate, the costs andcomplexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertaintywith respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge 54 Table of Contentsand industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similarindications that may be available to collaborate on and whether such collaboration could be more attractive than the one with us for our productcandidate. The terms of any collaboration or other arrangements that we may establish may not be favorable to us.We may also be restricted under existing license agreements from entering into future agreements on certain terms with potential collaborators.Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent businesscombinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable or unwilling to do so, we mayhave to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one ormore of our other development programs, delay its potential commercialization in some or all markets or reduce the scope of any sales or marketingactivities, or increase our expenditures and undertake development or commercialization activities at our own expense, including potentiallyincreasing our infrastructure and investment outside the United States. If we elect to increase our expenditures to fund development orcommercialization activities on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms or at all. If wedo not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue. Inaddition, such efforts may require diversion of a disproportionate amount of our attention away from other day-to-day activities and require devotionof a substantial amount of our time to managing these expansion activities.In addition, any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will dependheavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resourcesthat they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development andcommercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases,termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-makingauthority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by theother party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions oralliances.We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe willcomplement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize thebenefit of such transactions if we are unable to successfully integrate such businesses with our existing operations and company culture. We mayencounter numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition thatdelay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such transaction, wewill achieve the expected synergies to justify the transaction.Risks 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 willincur continued losses for the foreseeable future.Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Our operations to datehave been limited primarily to organizing and staffing our company and 55 Table of Contentsconducting research and development activities for beloranib, ZGN-1061, ZGN-839, ZGN-1258, and additional MetAP2 inhibitors. We have nevergenerated any revenue from product sales. We have not obtained regulatory approvals for any of our product candidates.Since our inception and until July 2016, we focused substantially all of our efforts and financial resources on developing beloranib, which was inPhase 3 clinical development for our lead indication of the treatment of hyperphagia and obesity in patients with PWS and Phase 2 clinicaldevelopment for the treatment of obesity in patients with hypothalamic injury-associated obesity, or HIAO. In December 2015, the FDA put thebeloranib IND application on full clinical hold. Due to the uncertainties, costs and risks associated with the development of beloranib, in July 2016, wesuspended further development of beloranib and directed our efforts and financial resources to developing ZGN-1061. In October 2016, we suspendedour development of ZGN-839 in order to focus all of our resources to developing ZGN-1061 and the discovery and development of novel and highlydifferentiated MetAP2 inhibitors. In 2018, we announced that we are returning to the rare metabolic disease space with a second highly optimizedMetAP2 development candidate, ZGN-1258, targeting an initial indication of PWS.We have funded our operations to date through proceeds from sales of redeemable convertible preferred stock, convertible debt and proceedsfrom our IPO and follow-on public offering, and have incurred losses in each year since our inception. Our net losses were $52.0 million for the yearended December 31, 2017 and $57.9 million for the year ended December 31, 2016. As of December 31, 2017, we had an accumulated deficit of$289.6 million. Substantially all of our operating losses resulted from costs incurred in connection with our development programs for beloranib,ZGN-1061, ZGN-1258 and ZGN-839, early research activities, licensing milestone fees and from general and administrative costs associated with ouroperations. We expect to incur increasing levels of operating losses over the next several years and for the foreseeable future. Our prior losses,combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. Weexpect our research and development expenses will increase over time in connection with our clinical trials of ZGN-1061, and of any other productcandidates we may choose to pursue, including ZGN-1258. In addition, if and when we obtain marketing approval for ZGN-1061 or ZGN-1258 we willincur significant sales, marketing and outsourced manufacturing expenses. We will continue to incur additional costs associated with operating as apublic company. As a result, we expect to continue to incur significant operating losses that would increase over time for the foreseeable future.Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any futurelosses 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 aquarterly or annual basis.Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from any of ourproduct candidates, and we do not know when, or if, we will generate any revenue. We do not expect to generate significant revenue unless and untilwe obtain marketing approval of, and begin to sell, our product candidates. Our ability to generate revenue depends on a number of factors, including,but not limited to, our ability to: • initiate and successfully complete clinical trials that meet their clinical endpoints; • initiate and successfully file an IND application as required to obtain FDA approval for ZGN-1258 clinical trials; • initiate and successfully complete all safety studies required to obtain U.S. and foreign marketing approval for ZGN-1061 in theindications we are pursuing; • commercialize our product candidates, if developed and approved, by developing a sales force or entering into collaborations with thirdparties; and • achieve market acceptance of our product candidates in the medical community and with third-party payors. 56 Table of ContentsAbsent our entering into a collaboration or partnership agreement, we expect to incur significant sales and marketing costs when we prepare tocommercialize our product candidates. Even if we initiate and successfully complete our clinical trials of our product candidates, and our productcandidates are approved for commercial sale, and despite expending these costs, our product candidates may not be commercially successful drugs. Wemay not achieve profitability soon after generating product sales, if ever. If we are unable to generate sufficient product revenue, we will not becomeprofitable and may be unable to continue operations without continued funding.We will need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital whenneeded may force us to delay, limit or terminate our product development efforts or other operations.Developing small molecule products is expensive, and we expect our research and development expenses to increase substantially in connectionwith our ongoing activities, particularly as we advance ZGN-1061 into later stage clinical trials and as we continue our preparations for filing an INDapplication for ZGN-1258 with the FDA and advance into the clinical trial stage. Depending on the status of regulatory approval or, if approved,commercialization of ZGN-1061, ZGN-1258, or any of our other product candidates, as well as the progress we make in selling ZGN-1061 or any of ourother product candidates, we will require additional capital to fund operating needs thereafter. We may also need to raise additional funds sooner if wechoose to pursue additional indications and/or geographies for ZGN-1061, ZGN-1258, or our other product candidates or otherwise expand morerapidly than we presently anticipate.As of December 31, 2017, our cash, cash equivalents and marketable securities were $102.1 million. We expect that our cash, cash equivalentsand marketable securities will be sufficient to fund our current operations for a period of at least one year from the issuance date of this Annual Report.However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner thanplanned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements andother collaborations, strategic alliances and licensing arrangements or a combination of these approaches. In any event, we will require additionalcapital to obtain regulatory approval for, and to commercialize, our product candidates. Raising funds in the current economic environment maypresent additional challenges. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital ifmarket 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 developand commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on termsacceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance ofadditional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale ofadditional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixedpayment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt,limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our abilityto conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage thanotherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidate or otherwise agree to termsunfavorable 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 researchor development programs or the commercialization of any product candidate or be unable to expand our operations or otherwise capitalize on ourbusiness opportunities, as desired, which could materially affect our business, financial condition and results of operations. 57 Table of ContentsRaising 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 andlicensing arrangements. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable intocommon stock, a stockholder’s ownership interest in our company will be diluted. In addition, the terms of any such securities may include liquidationor other preferences that materially adversely affect the rights of our stockholders. Debt financing, if available, would increase our fixed paymentobligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additionaldebt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic partnerships and licensingarrangements with third parties, we may have to relinquish valuable rights to ZGN-1061, ZGN-1258, or other product candidates, our intellectualproperty, 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 will continue to 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, issubject to wide fluctuations. From January 1, 2017 to December 31, 2017 the daily closing price of our common stock on the NASDAQ Global Marketranged from a high of $5.08 to a low of $3.24 and will continue 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 nonclinical studies and clinical trials of ZGN-1061, ZGN-1258, and/or other product candidates; • the failure of the FDA to accept our IND for ZGN-1061 or for ZGN-1258; • the failure of the FDA or the EMA to approve ZGN-1061 or ZGN-1258; • our ability to establish an adequate safety margin and profile for ZGN-1061, ZGN-1258, or other product candidates, including risk ofserious thromboembolic events; • announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors; • the success or failure of other type 2 diabetes or PWS therapies; • regulatory or legal developments in the United States and other countries; • failure of ZGN-1061 or ZGN-1258, if successfully developed and 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; 58 Table of Contents • 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, regardlessof our actual operating performance, which may limit or prevent investors from readily selling their shares of common stock and may otherwisenegatively affect the liquidity of our common stock. In addition, the stock market in general, and NASDAQ listed and biopharmaceutical companies inparticular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance ofthese companies. In the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigationagainst the company that issued the stock.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. Anamended complaint was filed on February 22, 2016. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities ExchangeAct of 1934 and SEC Rule 10b-5 based on allegedly false and misleading statements and omissions regarding our clinical trials for beloranib. OnAugust 9, 2016, the District Court granted the motion to dismiss and dismissed the amended complaint with prejudice. On August 12, 2016, plaintiffsfiled a notice of appeal to the First Circuit Court of Appeals and, on April 7, 2017 the dismissal with prejudice was affirmed.Our executive officers, directors, and principal stockholders exercise significant control over our company.As of March 1, 2018, the existing holdings of our executive officers, directors, principal stockholders and their affiliates, including investmentfunds affiliated with Atlas Ventures, or Atlas, and entities affiliated with Fidelity Investment (FMR LLC), or Fidelity, represent beneficial ownership, inthe aggregate, of approximately 38.4% of our common stock. As a result, these stockholders, if they act together, are able to influence our managementand affairs and control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger,consolidation, or sale of all or substantially all of our assets. The concentration of voting power among these stockholders may have an adverse effecton 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 couldsignificantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equitysecurities.We 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 is especially relevant for us because biotechnology and pharmaceutical companies have experienced significant stock price volatility inrecent 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 59 Table of ContentsAviad Bessler v. Zafgen, Inc. and Thomas E. Hughes, No. 1:15-cv-13618. An amended complaint was filed on February 22, 2016. The amendedcomplaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 based on allegedly false andmisleading statements and omissions regarding our clinical trials for beloranib. On August 9, 2016, the District Court granted the motion to dismissand dismissed the amended complaint with prejudice. On August 12, 2016, plaintiffs filed a notice of appeal to the First Circuit Court of Appeals and,on April 7, 2017 the dismissal with prejudice was affirmed.We are an “emerging growth company” and have availed ourselves of reduced disclosure requirements applicable to emerging growth companies,which could make 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 theauditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in ourperiodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation andshareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that anemerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complyingwith new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards untilthose standards would otherwise apply to private companies. However, we are electing not to take advantage of such extended transition period, and asa result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required fornon-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period forcomplying with new or revised accounting standards is irrevocable. We cannot predict if investors will find our common stock less attractive becausewe 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 aless active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions untilwe 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 inwhich we have total annual gross revenue of $1.0 billion or more; (ii) December 31, 2019; (iii) the date on which we have issued more than $1.0 billionin nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under the rules of theSEC.We have never paid dividends on our common stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, anygains from an investment 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 thedevelopment and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gains for our commonstockholders for the foreseeable future. Consequently, in the foreseeable future, our common stockholders will likely only experience a gain from theirinvestment in our common stock if the price of our common stock increases.If equity research analysts do not continue to publish research or reports about our business or if they issue unfavorable commentary or downgradeour common 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 ourbusiness. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stockor if analysts issue other unfavorable commentary or cease publishing reports about us or our business. 60 Table of ContentsAnti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisionsof Delaware 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 theeffect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governancedocuments include provisions: • 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 containvoting, 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 ofcandidates for election 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 previouslyscheduled special meetings.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,which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations withoutapproval of the holders 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 ofdelaying or deterring 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 the price 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 toJuly 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 onthe second floor of the same location from April 15, 2015 to July 31, 2017, with two options to extend the lease for three additional years each. InJanuary 2017, we extended the leases for both office spaces in Boston, Massachusetts with new terms expiring on July 31, 2020. In addition, with thelandlord’s consent, we have subleased the 2,976 square feet of office space on the second floor to an unrelated third party beginning on January 1,2017 and expiring on December 31, 2018. We have also leased 3,079 square feet of office space in San Diego, California, from October 1, 2015 toSeptember 30, 2019, with an option to extend the lease for five additional years. We believe that our existing facilities are adequate for our currentneeds. When our leases expire, we may renew the existing leases or look for additional or alternate space for our operations. We believe that anyadditional space we may require will be available on commercially reasonable terms. 61 Table of ContentsITEM 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. Anamended complaint was filed on February 22, 2016. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities ExchangeAct of 1934 and SEC Rule 10b-5 based on allegedly false and misleading statements and omissions regarding our clinical trials for beloranib. OnAugust 9, 2016, the District Court granted the motion to dismiss and dismissed the amended complaint with prejudice. On August 12, 2016, plaintiffsfiled a notice of appeal to the First Circuit Court of Appeals and, on April 7, 2017 the dismissal with prejudice was affirmed.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 notanticipate would have a material adverse impact on our financial position, results of operations or cash flows.ITEM 4. MINE SAFETY DISCLOSURESNot applicable. 62 Table of ContentsPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket InformationOur common stock commenced trading under the symbol “ZFGN” on the NASDAQ Global Market on June 19, 2014. Prior to that time, there wasno public market for our common stock. Our common stock in our initial public offering, or IPO, priced at $16.00 per share on June 18, 2014. Thefollowing table sets forth on a per share basis, for the periods indicated, the low and high prices of our common stock as reported by the NASDAQGlobal Market. High Low 2016 First Quarter $12.18 $5.34 Second Quarter $8.28 $5.54 Third Quarter $7.10 $2.90 Fourth Quarter $3.83 $2.89 2017 First Quarter $4.87 $3.18 Second Quarter $5.46 $3.35 Third Quarter $3.85 $3.21 Fourth Quarter $4.83 $3.34 On March 1, 2018, the last reported sales price of our common stock on the Nasdaq Global Market was $7.77 and as of March 1, 2018, there wereapproximately 28 holders of record of our common stock. However, because many of our outstanding shares are held in accounts with brokers andother institutions, 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 foreseeablefuture. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Any futuredetermination to declare dividends will be subject to the discretion of our board of directors and will depend on various factors, including applicablelaws, our results of operations, financial condition, future prospects, and any other factors deemed relevant by our board of directors. In addition, theterms of our outstanding indebtedness restrict our ability to pay dividends, and any future indebtedness that we may incur could preclude us frompaying dividends. 63 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 underthe Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof andirrespective of any general 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 commonstock), through December 31, 2017 for (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the NASDAQ Biotechnology Index. Pursuantto applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividendshave been declared on our common 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 any predictions 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 ofCertain Beneficial Owners and Management and Related Stockholder Matters.”Issuer Purchases of Equity Securities by the Issuer and Affiliated PurchasersNone. 64 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 belowshould be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the auditedconsolidated financial statements, and the notes thereto, and other financial information included herein. Our historical results are not necessarilyindicative of our future results. Year Ended December 31, 2017 2016 2015 2014 2013 (in thousands, except per share data) Statement of Operations Data: Revenue $— $— $— $— $— Operating expenses: Research and development 40,839 39,936 54,618 27,391 9,561 General and administrative 12,160 18,289 19,195 8,141 4,219 Total operating expenses 52,999 58,225 73,813 35,532 13,780 Loss from operations (52,999) (58,225) (73,813) (35,532) (13,780) Other income (expense): Interest income 996 894 438 28 — Interest expense (165) (529) (806) (870) — Foreign currency transaction gains (losses), net 140 (18) (105) (104) (247) Total other income (expense), net 971 347 (473) (946) (247) Net loss (52,028) (57,878) (74,286) (36,478) (14,027) Accretion of redeemable convertible preferred stock to redemption value — — — (92) (213) Net loss attributable to common stockholders $(52,028) $(57,878) $(74,286) $(36,570) $(14,240) Net loss per share attributable to common stockholders, basic and diluted (1) $(1.90) $(2.12) $(2.78) $(3.00) $(19.53) Weighted average common shares outstanding, basic and diluted 27,433 27,298 26,756 12,189 729 December 31, 2017 2016 2015 2014 2013 (in thousands) Balance Sheet Data: Cash, cash equivalents and marketable securities $102,052 $129,194 $185,079 $115,462 $35,517 Working capital (2) 97,632 121,005 171,567 110,297 34,443 Total assets 105,510 131,621 189,106 117,519 38,138 Notes payable, net of discount, long-term 20,000 — 3,453 6,177 — Redeemable convertible preferred stock — — — — 103,797 Total stockholders’ equity (deficit) 78,217 121,727 169,110 104,441 (68,574) (1)See Note 9 to our 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. 65 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 in conjunction with our “SelectedFinancial Data” and our consolidated financial statements, related notes and other financial information included elsewhere in this Annual Reporton Form 10-K, or Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results coulddiffer materially from the results described, in or implied by, these forward-looking statements. Factors that could cause or contribute to thosedifferences include, but are not limited to, those identified below and those discussed above in the section entitled “Risk Factors.”We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.We disclaim any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, or SEC, to publiclyupdate or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statementsmay be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.OverviewWe are a biopharmaceutical company dedicated to significantly improving the health and well-being of patients affected by type 2 diabetes,Prader-Willi syndrome, or PWS, and potentially other metabolically related disorders. We are focused on developing novel therapeutics that treat theunderlying biological mechanisms through the methionine aminopeptidase 2, or MetAP2, pathway. We have pioneered the study of MetAP2 inhibitorsin both common and rare forms of obesity. Our lead product candidate is ZGN-1061, a novel fumagillin-class MetAP2 inhibitor administered bysubcutaneous injection, which is currently being profiled for its utility in the treatment of type 2 diabetes and other related metabolic disorders. Wehave completed a Phase 1 clinical trial of ZGN-1061 in the Netherlands, which was comprised of a single ascending dose, or SAD, portion and amultiple ascending dose, or MAD, portion. This clinical trial evaluated ZGN-1061 for safety, tolerability and pharmacokinetics while also gaining anearly indication of efficacy over four weeks of treatment. We reported positive top line results from this clinical trial in May 2017 and presented thefull data package at the American Diabetes Association’s 77th Annual Scientific Sessions in June 2017. In this Phase 1 assessment ZGN-1061demonstrated rapid drug absorption and clearance in line with criteria established in advance for the molecule, and had a favorable tolerability profilewith no safety signals identified, including no evidence of pro-thrombotic effects. The data show that ZGN-1061 treatment causes improvements acrossmultiple metabolic measures consistent with MetAP2 inhibition, and patients in the clinical trial experienced mean weight loss of up to approximatelyone pound per week. In the third quarter of 2017, we advanced ZGN-1061 into a Phase 2 clinical trial in both Australia and New Zealand, in patientswith type 2 diabetes who are obese and are failing to respond adequately to current therapies. In March 2018, we reported results of an interim analysisof this clinical trial. We expect to report full results of the core part of this clinical trial mid-year 2018, and the results of the entire trial, including theadditional arm recently added to the trial, early in 2019. In January 2018, we announced advancement of our highly optimized MetAP2 developmentcandidate ZGN-1258, and in the first quarter of 2018, initiated investigational new drug, or IND, application enabling nonclinical efforts for evaluationin the treatment of people affected by PWS. We anticipate filing an IND application with the U.S. Food and Drug Administration, or FDA, andbeginning Phase 1 clinical development by the end of 2018.ZGN-1061 was discovered by our researchers as part of a multi-year campaign to identify novel compounds that avoided limiting nonclinicalsafety concerns observed with our first-generation compound. The compound has similar potency, and range of desired pharmacological activities inanimal models as other MetAP2 inhibitors, including beloranib. ZGN-1061 displays broadly improved safety margins in nonclinical studies,supporting the value of the compound as a more highly optimized drug product candidate.ZGN-1061 acts through potent inhibition 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 66 Table of Contentscellular stress and growth factor mediators, thereby reducing the tone of signals that drive lipid synthesis by the liver and fat storage throughout thebody. In this manner, MetAP2 inhibition serves the purpose of re-establishing balance to the ways the body stores and metabolizes fat and glucose.MetAP2 inhibitors reduce the production of new fatty acid molecules by the liver and help convert stored fats into useful energy, while stimulating useof glucose and fats as an energy source. In the setting of type 2 diabetes, these processes lead to improvement of glycemic control.ZGN-1258 was also discovered by our researchers as part of a multi-year campaign to identify novel compounds that avoided limitingnonclinical safety concerns observed with our first-generation compound. The compound has similar potency, and range of desired pharmacologicalactivities in animal models as other MetAP2 inhibitors, including beloranib. ZGN-1258 displays broadly improved safety margins in nonclinicalstudies, supporting the value of the compound as a more highly optimized drug product candidate.ZGN-1258 acts through potent inhibition of MetAP2. Like other MetAP2 inhibitors, ZGN-1258 modulates the activity of key cellular processesthat control metabolism and impact lipid synthesis and storage throughout the body and leads to increase use of stored fats as an energy source.ZGN-1258 displays enhanced uptake into the brain and displays greater potency and activity in animal models of hyperphagic behaviors relative toother compounds including ZGN-1061. These differences support the use of ZGN-1258 in higher need indications such as PWS, in which brain activityis likely to be more important for therapeutic effect. Treatment of obese and hyperphagic animals with ZGN-1258 leads to reduction in both pathologicfood intake and rapid body weight loss, making it of interest in the treatment of severe forms of human obesity.Since our inception in November 2005, we have devoted substantially all of our resources to developing ZGN-1061, beloranib, ZGN-839,ZGN-1258 and additional MetAP2 inhibitors, building our intellectual property portfolio, developing our supply chain, business planning, raisingcapital, and providing general and administrative support for such operations. From our inception through our initial public offering, or IPO, inJune 2014, we received gross proceeds of $104.0 million from sales of redeemable convertible preferred stock and, to a lesser extent, through theissuances of convertible promissory notes. During June 2014, we completed our IPO with net proceeds of $102.7 million after deducting underwritingdiscounts and commissions paid by us. On January 28, 2015, we completed a follow-on offering of our common stock, with net proceeds of$130.0 million after deducting underwriting discounts and commissions paid by us.We have never generated any revenue and have incurred net losses in each year since our inception. We have an accumulated deficit of$289.6 million as of December 31, 2017. Our net loss was $52.0 million for the year ended December 31, 2017 and $57.9 million for the year endedDecember 31, 2016. These losses have resulted principally from costs incurred in connection with in-licensing of beloranib, research and developmentactivities and general and administrative costs associated with our operations. We expect to incur significant expenses and operating losses for theforeseeable future.We expect to continue to incur expenses in connection with our ongoing activities, if and as we: • advance the development of ZGN-1061 through Phase 2 clinical trials; • advance the development of ZGN-1258 through nonclinical and clinical development; • seek to identify and advance development of additional product candidates into clinical development and indications for our productcandidates; • 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. 67 Table of ContentsAs a result, we will need additional financing to support our continuing operations. Until such time that we can generate significant revenue fromproduct sales, if ever, we expect to finance our operations through a combination of public, private equity, debt financings, or other sources, which mayinclude collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies orproduct candidates. In addition, we may never successfully complete development of any of our product candidates, obtain adequate patent protectionfor our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved productcandidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when neededwould have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenueto achieve profitability, and we may never do so.We expect that our existing cash, cash equivalents and marketable securities as of December 31, 2017, will enable us to fund our operatingexpenses and capital expenditure requirements for a period of at least one year from the issuance date of this Annual Report. See “—Liquidity andCapital 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 productsin the near future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for ourproduct candidates, we may generate revenue from those product candidates or collaborations.Operating ExpensesThe majority of our operating expenses since inception have consisted primarily of research and development activities, and general andadministrative costs.Research and Development ExpensesResearch and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensedas incurred. Research and development expenses consist primarily of: • personnel costs, including salaries, related benefits and stock-based compensation for employees engaged in scientific research anddevelopment functions; • third-party contract costs relating to research, formulation, manufacturing, nonclinical studies and clinical trial activities; • external costs of outside consultants; • payments made under our third-party licensing agreements; • sponsored research agreements; • laboratory consumables; and • allocated facility-related costs.We are currently primarily focused on developing ZGN-1061, ZGN-1258 and other early research activities and typically use our employee,consultant and infrastructure resources across our research and development programs. We track outsourced development costs by product candidate ordevelopment program, but we do not allocate personnel costs, external consultant costs, payments made under our licensing agreements or otherinternal costs to specific development programs or product candidates unless the payments are specifically identifiable to a development program orproduct candidate. We record our research and development expenses net of any research and development tax incentives we are entitled to receivefrom government authorities. 68 Table of ContentsResearch 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. Weexpect that our research and development expenses will increase in the foreseeable future as we pursue later stages of clinical development of ourproduct candidates.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 what extent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. Wemay never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical trials anddevelopment of our product candidates will depend on a variety of factors, including: • the scope, rate of progress, and expense of clinical trials and other research and development activities; • clinical trial results; • uncertainties in clinical trial enrollment rate or design; • significant and changing government regulation; • the timing and receipt of any regulatory approvals; and • the FDA’s or other regulatory authority’s influence on clinical trial design.A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in thecosts and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require usto conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate,or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financialresources and time on the completion of clinical development.General and Administrative ExpensesGeneral and administrative expenses consist primarily of personnel costs, consisting of salaries, related benefits and stock-based compensation,of our executive, finance, business and corporate development and other administrative functions. General and administrative expenses also includetravel expenses, allocated facility-related costs not otherwise included in research and development expenses, insurance expenses, and professionalfees for auditing, tax and legal services, including legal expenses to pursue patent protection of our intellectual property. We expect that general andadministrative expenses will remain relatively consistent during 2018 as compared to 2017.Other Income (Expense)Interest income. Interest income consists of interest earned on our cash equivalents and marketable securities. Our interest income has not beensignificant due to low interest earned on invested balances. We anticipate that our interest income will decrease as we continue to incur operatinglosses.Interest expense. Interest expense during the years ended December 31, 2017 and 2016, relates to outstanding borrowings under the 2014 CreditFacility, consisting of the stated interest of 8.1% per year due on outstanding borrowings, a final payment of 6% of amounts drawn down that wasrecorded as interest expense over the term through the maturity date using the effective-interest method, the amortization of deferred financing costs,the accretion of debt discounts relating to the 2014 Credit Facility. Interest expense in 2018 will relate to the Term Loan of $20.0 million, whichclosed on December 29, 2017. It bears a variable interest at an annual rate of 1.25% above the prime rate, as well as a final payment equal to 8.0% ofthe Term Loan is being recorded as interest expense over the term through the maturity date using the effective-interest method. 69 Table of ContentsForeign currency 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 engagein hedging activities related to our foreign currency-denominated receivables and payables; as such, we cannot predict the impact of future foreigncurrency transaction gains and 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 orour earned tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2017, we had net operating loss carryforwardsfor federal and state income tax purposes of $54.0 million and $39.6 million, respectively, which begin to expire in 2026 and 2030, respectively. As ofDecember 31, 2017, we also had available tax credit carryforwards for federal and state income tax purposes of $14.8 million and $2.4 million,respectively, which begin to expire in 2026 and 2021, respectively.On December 22, 2017, the Tax Cuts and Jobs Act, or the TCJA, was signed into United States law. The TCJA includes a number of changes toexisting tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from a top marginal rate of 34% downto a flat rate of 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of annual taxable income andelimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such netoperating losses may be carried forward indefinitely). The tax rate change resulted in a reduction in the gross amount of our deferred tax assets recordedas of December 31, 2017 with an offsetting reduction in the related valuation allowance, resulting in no income tax expense or benefit beingrecognized as of the enactment date of the TCJA. In accordance with guidance in SEC Staff Accounting Bulletin No. 118, the final determination of theremeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from thedate of enactment of the 2017 Tax Act.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, amongother things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to takeadvantage of the extended 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 or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerginggrowth companies. Section 107 of the JOBS Act 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 have elected 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 the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall StreetReform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Boardregarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financialstatements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executivecompensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptionsapply for a period of five years following the completion of our IPO in June 2014 or until we no longer meet the requirements of being an “emerginggrowth company,” whichever is earlier. 70 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.The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reportedamount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in theaccounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these tobe our critical accounting policies. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimatesunder different assumptions and conditions. See also Note 2 of our consolidated financial statements included elsewhere in this Annual Report forinformation about these critical accounting policies as well as a description of our other significant accounting policies.Research and Development ExpensesAs part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and developmentexpenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel and outside vendors to identifyservices that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services whenwe have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for servicesperformed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of ouraccrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time.Examples of estimated accrued research and development expenses include 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 nonclinical development activities; and • vendors related to product candidate manufacturing, development and distribution of clinical supplies.We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multipleCROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract tocontract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of servicesprovided and result in a prepayment of the clinical expense, nonclinical expense, or manufacturing activities. Payments under some of these contractsdepend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate thetime period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in eachperiod. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly.Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing ofservices performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high ortoo low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and developmentexpenses.Stock-Based CompensationWe have historically issued equity awards to employees, directors and consultants, generally in the form of options to purchase shares of ourcommon stock and, to a lesser extent, shares of restricted common stock. We measure stock-based awards granted to employees and directors at fairvalue on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generallythe 71 Table of Contentsvesting period of the respective award. Generally, we issue stock options and restricted stock awards with only service-based vesting conditions andrecord the expense for these awards using the straight-line method. We measure stock-based awards granted to consultants and nonemployees at the fairvalue of the award on the date at which the related service is complete. Compensation expense is recognized over the period during which services arerendered by such consultants and nonemployees until completed. At the end of each financial reporting period prior to completion of the service, thefair value of these awards is re-measured using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholesoption-pricing model.We estimate the fair value of each service-based stock option grant using the Black-Scholes option-pricing model, which uses as inputs the fairvalue of our common stock and assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-freeinterest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Until completion of our IPO inJune 2014, we were a private company and lacked company-specific historical and implied volatility information. Therefore, we estimated ourexpected volatility based on the historical volatility of our publicly traded peer companies and expect to continue to do so until such time as we haveadequate historical data regarding the volatility of our traded stock price. The expected term of our options has been determined utilizing the“simplified” method for awards that qualify as “plain-vanilla” options, while the expected term of our options granted to consultants andnonemployees has been determined based on the contractual term of the options. 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 approximately equal to the expected term of the award. Expecteddividend 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.In October 2017, we granted market-based stock option awards which are valued using Monte Carlo simulation models. The number of optionsexpected to vest, based on achievement of the specified market condition, is factored into the grant date Monte Carlo valuations. Compensationexpense is recognized ratably over the attribution period.The assumptions we used to determine the fair value of service-based stock options granted to employees and directors are as follows, presentedon a weighted average basis: 2017 2016 2015 Risk-free interest rate 2.10% 1.40% 1.75% Expected term (in years) 6.17 6.18 6.25 Expected volatility 93% 87% 87% Expected dividend yield 0% 0% 0% The assumptions that we used to determine the fair value of the market-based stock options granted to employees are as follows, presented on aweighted average basis: 2017 Risk-free interest rate 2.24% Expected term (in years) 6.3 Expected volatility 94.6% Expected dividend yield 0% These assumptions represented our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As aresult, if factors change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materiallydifferent. We recognize compensation expense for only the portion of awards that are expected to vest. 72 Table of ContentsThe following table summarizes the classification of our stock-based compensation expenses recognized in our consolidated statements ofoperations and comprehensive loss: Year Ended December 31, 2017 2016 2015 (in thousands) Research and development $4,138 $3,543 $2,930 General and administrative 4,163 6,390 5,652 $8,301 $9,933 $8,582 As of December 31, 2017, we had unrecognized stock-based compensation expense related to our unvested service-based stock option awards of$10.7 million, which is expected to be recognized over the remaining weighted average vesting period of 2.54 years.As of December 31, 2017, we had unrecognized stock-based compensation expense related to our unvested market-based stock option awards of$3.1 million, which is expected to be recognized over the remaining weighted average vesting period of 2.77 years.Results of OperationsComparison of Years Ended December 31, 2017 and 2016The following table summarizes our results of operations for the years ended December 31, 2017 and 2016: Year Ended December 31, 2017 2016 Increase(Decrease) (in thousands) Statement of Operations Data: Revenue $— $— $— Operating expenses: Research and development 40,839 39,936 903 General and administrative 12,160 18,289 (6,129) Total operating expenses 52,999 58,225 (5,226) Loss from operations (52,999) (58,225) 5,226 Other income (expense): Interest income 996 894 102 Interest expense (165) (529) 364 Foreign currency transaction gains (losses), net 140 (18) 158 Total other income (expense), net 971 347 624 Net loss $(52,028) $(57,878) $5,850 73 Table of Contents Year Ended December 31, 2017 2016 Increase(Decrease) (in thousands) Direct research and development expenses by program: ZGN-1061: Nonclinical and manufacturing $11,945 $5,539 $6,406 Clinical trials 6,000 2,054 3,946 Subtotal 17,945 7,593 10,352 Discovery and screening 6,339 393 5,946 Beloranib: Nonclinical and manufacturing 681 5,242 (4,561) Clinical trials 65 8,393 (8,328) Subtotal 746 13,635 (12,889) ZGN-839 — 858 (858) Subtotal 25,030 22,479 2,551 Unallocated expenses: Personnel related 7,851 8,694 (843) Non-cash stock-based compensation 4,138 3,543 595 Consultants 2,286 3,256 (970) Other 1,534 1,964 (430) Subtotal 15,809 17,457 (1,648) Total research and development expenses $40,839 $39,936 $903 Research and development expensesResearch and development expenses for the year ended December 31, 2017 increased $0.9 million compared to the year ended December 31,2016. The increase was primarily due to an increase of $10.4 million related to our ZGN-1061 program, as well as an increase in discovery andscreening expenses of $5.9 million, partially offset by decreased costs of $12.9 million in our beloranib program and a decrease of $1.6 millionassociated with our unallocated expenses.Costs associated with our ZGN-1061 program increased period over period by $10.4 million. In the third quarter of 2016 we initiated a Phase 1clinical trial for ZGN-1061 which completed recruiting and dosing patients in the first quarter of 2017. The overall increase is primarily due toadditional nonclinical studies as well as drug product and drug substance activities as we commenced our Phase 2 clinical trial in the third quarter of2017 in both Australia and New Zealand, for which we enrolled 137 patients in a 12 week clinical trial. The expenses during the 2016 period were forstartup costs for a Phase 1 clinical trial of ZGN-1061 in the Netherlands, which was comprised of 39 patients in a single ascending dose, or SAD,portion and 29 patients in a multiple ascending dose, or MAD, portion.Of the decrease in costs associated with our beloranib program, clinical trials costs decreased by $8.3 million period over period and nonclinicaland manufacturing costs decreased $4.6 million period over period, both as a result of the suspension of our beloranib program in July 2016. Duringthe year ended December 31, 2016, we reported topline clinical data from our Phase 2b clinical trial in patients with severe obesity complicated bytype 2 diabetes and our U.S. Phase 3 clinical trial in patients with PWS. Prior to the FDA placing the IND application for beloranib on full clinical holdin December 2015, we suspended dosing of patients in the randomized portion of both of these trials in October 2015. In July 2016, we announced thesuspension of our beloranib program. 74 Table of ContentsUnallocated expenses decreased period over period primarily due to a decrease of $1.0 million in consultants, as well as a decrease in personnelrelated costs of $0.8 million. Consultant costs decreased primarily related to our beloranib program which we suspended in July 2016. Personnelrelated expenses decreased primarily from a reduction in the number of employees for the 2017 period as compared to the 2016 period, as we had areduction in workforce which took place in July 2016. Year Ended December 31, 2017 2016 Increase(Decrease) (in thousands) Personnel related $2,320 $4,401 $(2,081) Non-cash stock-based compensation 4,163 6,390 (2,227) Professional fees 3,908 5,489 (1,581) Other 1,769 2,009 (240) Total general and administrative expenses $12,160 $18,289 $(6,129) General and administrative expensesGeneral and administrative expenses for the year ended December 31, 2017 decreased $6.1 million compared to the year ended December 31,2016. The decrease was due to decreases in non-cash stock-based compensation expense of $2.2 million, personnel related costs of $2.1 million andprofessional fees of $1.6 million. Non-cash stock-based compensation expense decreased due mainly to forfeited stock options related to the reductionin workforce in July 2016, as well as a lower stock option grant price for the 2017 annual grant. Personnel related expenses decreased primarily from areduction in the number of employees for the 2017 period as compared to the 2016 period, from the reduction in workforce which took place inJuly 2016. Professional fees decreased primarily due to lower legal fees as the plaintiffs for the class action lawsuit had filed a notice of appeal to theFirst Circuit Court of Appeals and on April 7, 2017, the dismissal with prejudice was affirmed. The decrease was also due to lower commercial readinesscosts and investor relations and public relations costs in the 2017 period as compared to the same period in 2016, primarily as a result of suspendingdevelopment of beloranib in July 2016.Other income (expense), netInterest expense. Interest expense for the year ended December 31, 2017 and 2016 of $0.2 million and $0.5 million, respectively, was related tointerest expense on our outstanding borrowings under the 2014 Credit Facility, which was fully repaid in December 2017. Interest expense consistsprimarily of the stated interest of 8.1% per year due on outstanding borrowings. It also includes expense related to the final payment of 6% of amountsdrawn down that was recorded over the term through the maturity date using the effective-interest method and the amortization of deferred financingcosts and debt discounts relating to the 2014 Credit Facility.Interest income. Interest income of $1.0 million and $0.9 million for the years ended December 31, 2017 and 2016, respectively, was related tointerest earned on our marketable securities balances.Foreign currency transaction gains (losses), net. We had foreign currency transaction gains of $0.1 million for the year ended December 31,2017 and no impact in 2016. Foreign currency transaction gains and losses consisted of the realized and unrealized gains and losses from foreigncurrency-denominated cash balances, vendor payables and tax-related receivables from the Australian government, generally reflecting the fluctuationof the Australian dollar relative to the U.S. dollar. 75 Table of ContentsComparison of Years Ended December 31, 2016 and 2015The following table summarizes our results of operations for the years ended December 31, 2016 and 2015: Year Ended December 31, 2016 2015 Increase(Decrease) (in thousands) Statement of Operations Data: Revenue $— $— $— Operating expenses: Research and development 39,936 54,618 (14,682) General and administrative 18,289 19,195 (906) Total operating expenses 58,225 73,813 (15,588) Loss from operations (58,225) (73,813) 15,588 Other income (expense): Interest income 894 438 456 Interest expense (529) (806) 277 Foreign currency transaction gains (losses), net (18) (105) 87 Total other income (expense), net 347 (473) 820 Net loss $(57,878) $(74,286) $16,408 Research and development expenses Year Ended December 31, 2016 2015 Increase(Decrease) (in thousands) Direct research and development expenses by program: Beloranib: Nonclinical and manufacturing $5,242 $11,676 $(6,434) Clinical trials 8,393 17,893 (9,500) Subtotal 13,635 29,569 (15,934) Second-generation MetAP2 inhibitors, including ZGN-1061 7,593 5,842 1,751 ZGN-839 858 4,854 (3,996) Discovery and screening 393 — 393 Subtotal 22,479 40,265 (17,786) Unallocated expenses: Personnel related 8,694 6,122 2,572 Non-cash stock-based compensation 3,543 2,930 613 Consultants 3,256 3,772 (516) Other 1,964 1,529 435 Subtotal 17,457 14,353 3,104 Total research and development expenses $39,936 $54,618 $(14,682) Research and development expenses for the year ended December 31, 2016 decreased $14.7 million compared to the year ended December 31,2015. The decrease was primarily due to a $15.9 million decrease in our beloranib program, and a decrease of $4.0 million associated with ourZGN-839 program, partially offset by increased costs of $3.1 million associated with our unallocated expenses and increased costs of $1.8 million insecond-generation MetAP2 inhibitors, primarily related to ZGN-1061. 76 Table of ContentsOf the decrease in our beloranib program, clinical trial expenses for beloranib decreased by $9.5 million period over period as a result of thestatus of our clinical trials in 2016 and 2015. During the year ended December 31, 2016, we reported top-line clinical data from our Phase 2b clinicaltrial in patients with severe obesity complicated by type 2 diabetes and our U.S. Phase 3 clinical trial in patients with PWS. Prior to the FDA placingthe IND application for beloranib on full clinical hold in December 2015, we suspended dosing of patients in the randomized portion of both of theseclinical trials in October 2015. In July 2016, we announced the suspension of our beloranib program. During the year ended December 31, 2015, bothof the clinical trials noted above were ongoing, enrolling and dosing patients. Clinical trial activities undertaken by our Australian subsidiary arerecorded net of a 45% research and development tax incentive from the Australian government. This tax incentive reduced our expenses by$0.3 million and $1.4 million for the years ended December 31, 2016 and 2015, respectively. The decrease in nonclinical and manufacturing of$6.4 million period over period is due to stage of development as well as the fact that the beloranib IND application was on full clinical hold during2016, and in July 2016, we announced the suspension of our beloranib program. The decrease in ZGN-839 costs of $4.0 million period over period isdue to the withdrawal of our IND application in January 2016 in order to generate data from additional nonclinical studies requested by the FDA. InOctober 2016, we suspended further development of ZGN-839. We are focusing all of our personnel and financial resources on ZGN-1061 and thediscovery of novel and highly-differentiated MetAP2 inhibitors.Costs associated with our second-generation MetAP2 inhibitors, primarily related to ZGN-1061 increased period over period by $1.8 million.The work in 2016 was specific to ZGN-1061, including work in chemistry, toxicology, pharmacology and contract manufacturing costs. Additionally,in the third quarter of 2016 we initiated a Phase 1 clinical trial for ZGN-1061. During the 2015 period, we were conducting research and screeningactivities on a number of second-generation MetAP2 inhibitors.Unallocated expenses increased period over period primarily due to an increase in personnel related costs of $2.6 million, $0.6 million innon-cash stock-based compensation expense, and $0.4 million in other costs, partially offset by a decrease of $0.5 million in consultants. Personnelrelated expense increases resulted primarily from severance expense of $0.5 million as well as an increase in the number of employees for the first andsecond quarters of the 2016 period over the 2015 period. Subsequently, we had a reduction in workforce which took place in July 2016. Non-cashstock-based compensation expense was impacted by an increase in the annual stock option grant to employees during late March 2016. Otherunallocated expenses were driven by increases in travel expenses and facilities expenses. Consultant costs decreased primarily related to our beloranibprogram which we suspended in July 2016.General and administrative expenses Year Ended December 31, 2016 2015 Increase(Decrease) (in thousands) Personnel related $4,401 $4,285 $116 Non-cash stock-based compensation 6,390 5,652 738 Professional fees 5,489 7,037 (1,548) Other 2,009 2,221 (212) Total general and administrative expenses $18,289 $19,195 $(906) General and administrative expenses for the year ended December 31, 2016 decreased $0.9 million compared to the year ended December 31,2015. The decrease was primarily due to a decrease in professional fees of $1.5 million primarily due to the fact that we were no longer working onbranding and commercial-readiness related to PWS as we were on clinical hold throughout 2016, and then in July 2016 we suspended the developmentof our beloranib program. This decrease was partially offset by increased non-cash stock-based 77 Table of Contentscompensation expense of $0.7 million and increased personnel related costs of $0.1 million. The increase in non-cash stock-based compensationexpense was due to the annual stock option grant to employees during late March 2016 as well as the annual board of director’s grant in lateJune 2016. Personnel related costs increased period over period primarily due to severance expense of $0.9 million, partially offset by a reversal of partof the 2015 bonus expense during 2016, as executive officers were not paid a bonus during 2016, as well as an overall decrease in headcount.Other income (expense), netInterest expense. Interest expense for the years ended December 31, 2016 and 2015 of $0.5 million and $0.8 million, respectively, was related tointerest expense on our outstanding borrowings under the 2014 Credit Facility. Interest expense consists primarily of the stated interest of 8.1% peryear 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 discounts relating to the2014 Credit Facility.Interest income. Interest income of $0.9 million and $0.4 million for the years ended December 31, 2016 and 2015, respectively, was related tointerest earned on our marketable securities balances.Foreign currency transaction gains (losses), net. We had foreign currency transaction losses of less than $0.1 million and $0.1 million for theyears ended December 31, 2016 and 2015, respectively. Foreign currency transaction gains and losses consisted of the realized and unrealized gainsand losses from foreign currency-denominated cash balances, vendor payables and tax-related receivables from the Australian government, generallyreflecting the fluctuation of the Australian dollar relative to the U.S. dollar.Liquidity and Capital ResourcesAs of December 31, 2017, we had cash, cash equivalents and marketable securities totaling $102.1 million. We invest our cash in money marketfunds, commercial paper, certificates of deposits and corporate bonds, with the primary objectives to preserve principal, provide liquidity andmaximize income without 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, 2017, wehad an accumulated deficit of $289.6 million. Prior to our IPO in June 2014, we funded our operations primarily through sales of redeemableconvertible preferred stock and, to a lesser extent, through the issuances of convertible promissory notes and a loan security agreement. From ourinception through our IPO in June 2014, we received gross proceeds of $104.0 million from such transactions. During June 2014, we completed ourIPO with net proceeds of $102.7 million after deducting underwriting 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 a follow-on offering of our common stock, which resulted in the sale of 3,942,200shares at a price of $35.00 per share. We received net proceeds from the follow-on offering of $130.0 million based upon the price of $35.00 per shareand after deducting underwriting discounts and commissions paid by us. We also incurred offering costs of $0.5 million related to the follow-onoffering.As of December 31, 2017, we had fully repaid all outstanding amounts due under a loan and security agreement with Oxford Finance LLC andMidcap Financial, or the 2014 Credit Facility, entered into in March 2014.On December 29, 2017, we entered into a loan and security agreement with Silicon Valley Bank, or the Term Loan. The Term Loan provided forborrowings of $20.0 million. On December 29, 2017, we received proceeds of $20.0 million from the issuance of a promissory note. The promissorynote issued under the Term Loan is collateralized by substantially all of our personal property, other than our intellectual property. 78 Table of ContentsUpon entering into this Term Loan, we are obligated to make monthly, interest-only payments until March 29, 2019 and, thereafter, to pay 33consecutive, equal monthly installments of principal and interest from April 1, 2019 through December 1, 2021. The outstanding Term Loan bears avariable interest at an annual rate of 1.25% above the prime rate, which was 4.5% at December 31, 2017. In addition, a final payment equal to 8.0% ofthe Term Loan 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 accrue thefinal payment amount of $1.6 million, to outstanding debt by charges to interest expense using the effective-interest method from the date of issuancethrough the maturity date.Additionally, we, as the borrower, are required to maintain a minimum cash, cash equivalents and marketable securities balance at Silicon ValleyBank of no less than 105% of the total outstanding principal balance of the Term Loan, which as of December 31, 2017 was $21.0 million.Further, as of 45 days after the Term Loan was entered in, we must maintain a balance of unrestricted cash, cash equivalents and marketablesecurities at Silicon Valley Bank in an amount not less than the greater of (i) $55.0 million and (ii) sixty-five percent (65%) of all of our cash, cashequivalents and marketable securities. If we do not meet this requirement it will not be considered an event of default provided we immediately secure87.5% of the principal balance in a restricted cash account.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; permit the aggregatevalue of cash maintained by our Australian subsidiary not to exceed $4.0 million and certain other business transactions.The Term Loan also includes events of default, the occurrence and continuation of any of which provides the lenders the right to exerciseremedies against us and the collateral securing the loans under the Term Loan, including cash in the amount of the outstanding balance. These eventsof default include, among other things, failure to pay any amounts due under the Term Loan, insolvency, the occurrence of a material adverse event,the occurrence of any default under certain other indebtedness and a final judgment against us in an amount greater than $0.3 million.The following table summarizes our sources and uses of cash for each of the periods presented below: Year Ended December 31, 2017 2016 2015 (in thousands) Cash used in operating activities $(43,784) $(51,975) $(59,554) Cash provided by (used in) investing activities 35,647 51,447 (92,118) Cash provided by (used in) financing activities 16,562 (2,715) 129,164 Net increase (decrease) in cash and cash equivalents $8,425 $(3,243) $(22,508) Net cash used in operating activitiesDuring the year ended December 31, 2017, operating activities used $43.8 million of cash, resulting from our net loss of $52.0 million, partiallyoffset by non-cash charges of $8.3 million. Our net loss was primarily attributed to research and development activities related to our ZGN-1061program, discovery and screening and our general and administrative expenses, as we had no revenue in the period. Our net non-cash charges duringthe year ended December 31, 2017, consisted primarily of stock-based compensation expense of $8.3 million. Net cash used in changes in ouroperating assets and liabilities during the year ended December 31, 2017, consisted primarily of a $1.0 million increase in accounts payable andaccrued expenses, partially offset by a $0.6 million increase in prepaid expenses and other current assets and a $0.6 million increase in tax incentivereceivable. 79 Table of ContentsDuring the year ended December 31, 2016, operating activities used $52.0 million of cash, resulting from our net loss of $57.9 million andchanges in our operating assets and liabilities of $5.5 million, partially offset by non-cash charges of $11.4 million. Our net loss was primarilyattributed to research and development activities related to our beloranib program, our ZGN-1061 program, and our general and administrativeexpenses, as we had no revenue in the period. Our net non-cash charges during the year ended December 31, 2016, consisted primarily of stock-basedcompensation expense of $10.1 million. Net cash used in changes in our operating assets and liabilities during the year ended December 31, 2016,consisted primarily of a $6.9 million decrease in accounts payable and accrued expenses, partially offset by a $0.4 million decrease in prepaidexpenses and other current assets and a $1.0 million decrease in tax incentive receivable.During the year ended December 31, 2015, operating activities used $59.6 million of cash, resulting from our net loss of $74.3 million, partiallyoffset by non-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 wasprimarily attributed to research and development activities related to our beloranib program, licensing milestones and our general and administrativeexpenses, as we had no revenue in the period. Our net non-cash charges during the year ended December 31, 2015, consisted primarily of stock-basedcompensation expense of $8.6 million. Net cash provided by changes in our operating assets and liabilities during the year ended December 31, 2015,consisted primarily of $4.9 million increase in accounts payable and a $3.2 million increase in accrued expenses, partially offset by a $0.4 millionincrease in prepaid expenses and other current assets and a $1.0 million increase in tax incentive receivable.Net cash provided by (used in) investing activitiesDuring the year ended December 31, 2017, investing activities provided $35.6 million of cash resulting from proceeds from sales and maturitiesof marketable securities of $150.2 million, offset by the use of cash for purchases of marketable securities of $114.5 million and purchases of propertyand equipment of $0.1 million.During the year ended December 31, 2016, investing activities provided $51.4 million of cash resulting from proceeds from sales and maturitiesof marketable securities of $188.6 million, offset by the use of cash for purchases of marketable securities of $136.5 million and purchases of propertyand equipment of $0.7 million.During the year ended December 31, 2015, investing activities used $92.1 million of cash resulting from purchases of marketable securities of$287.5 million and purchases of equipment of $0.6 million. These uses were partially offset by proceeds from maturities of marketable securities of$196.0 million.Net cash provided by (used in) financing activitiesDuring the year ended December 31, 2017, net cash provided by financing activities of $16.6 million was the result of proceeds of $20.0 millionfrom our notes payable, as well as $0.2 million received from proceeds relating to the exercise of common stock options and common stock purchasedunder our 2014 Employee Stock Purchase Plan, partially offset by payments of $3.6 million related to our notes payable.During the year ended December 31, 2016, financing activities used $2.9 million for payments related to our notes payable, partially offset by$0.2 million received from proceeds relating to the exercise of common stock options and common stock purchased under our 2014 Employee StockPurchase Plan.During the year ended December 31, 2015, net cash provided by financing activities was $129.2 million as a result of proceeds of $129.6 millionfrom our follow-on public offering, net of underwriting discounts and commissions, as well as $1.0 million received from proceeds relating to theexercise of common stock options, offset by payments of $1.4 million related to our note payable. 80 Table of ContentsOperating Capital RequirementsZGN-1061 is currently in Phase 2 clinical development, therefore we expect to continue to incur significant expenses and operating losses for theforeseeable future. We anticipate that we will continue to incur expenses, if and as we: • advance the development of ZGN-1061 through Phase 2 clinical trials; • advance the development of ZGN-1258 through nonclinical and clinical development and if successful, later-stage clinical trials; • seek to identify additional product candidates and 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, 2017, will enable us to fund our operatingexpenses and capital expenditure requirements for a period of at least one year from the issuance date of this Annual Report. We have based thisestimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of thenumerous risks and uncertainties associated with the development ZGN-1061 and because the extent to which we may enter into collaborations withthird parties for the development of these product candidates is unknown, we are unable to estimate the amounts of increased capital outlays andoperating expenses associated with completing the research and development of our product candidates. Our future capital requirements for ZGN-1061will depend on many factors, including: • the costs, timing and outcome of regulatory review; • the costs of future research and development activities, including clinical trials; • the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defendingintellectual property-related claims; • the extent to which we acquire or in-license other products, product candidates, or 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 equityofferings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the saleof equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may includeliquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements thatinclude covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures ordeclaring dividends and may require the issuance of warrants, which could potentially dilute their ownership interest. If we raise additional fundsthrough collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies,future revenue streams, research programs or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds throughequity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercializationefforts or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves. 81 Table of ContentsSince 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 orour earned tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2017, we had net operating loss carryforwardsfor federal and state income tax purposes of $54.0 million and $39.6 million, respectively, which begin to expire in 2026 and 2030, respectively. As ofDecember 31, 2017, we also had available tax credit carryforwards for federal and state income tax purposes of $14.8 million and $2.4 million,respectively, which begin to expire in 2026 and 2021, respectively We have not completed a study to assess whether an ownership change, generallydefined as a greater than 50% change (by value) in the equity ownership of our corporate entity over a three-year period, has occurred or whether therehave been multiple ownership changes since our inception, due to the significant costs and complexities associated with such studies. Accordingly,our ability to utilize our tax carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilizedagainst future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes.Contractual Obligations and CommitmentsThe following table summarizes our contractual obligations as of December 31, 2017 and the effect such obligations are expected to have on ourliquidity and cash flow in future periods: Payments Due by Period Total (2) (3) Less Than1 Year 1-3 Years 3-5 Years More Than5 Years (in thousands) Operating lease commitments (1) $1,169 $479 $690 $— $— Debt commitments (4) 21,600 — 12,727 8,873 — $22,769 $479 $13,417 $8,873 $— (1)We entered into an operating lease for office space in Boston, Massachusetts on May 15, 2014, effective as of July 28, 2014, with a term expiringon July 31, 2017, and an option to extend the lease for three additional years. In March 2015, we entered into an operating lease for additionaloffice space in Boston, Massachusetts, effective as of April 15, 2015, with a term expiring on July 31, 2017, and two options to extend the leasefor three additional years each. In October 2015, we entered into an operating lease for office space in San Diego, California, effective as ofOctober 1, 2015, with a term expiring on September 30, 2019, and an option to extend the lease for five additional years. In January 2017, weextended the leases for both office spaces in Boston, Massachusetts, with new terms expiring on July 31, 2020. In addition, we have subleased2,976 square feet of office space in Boston, Massachusetts to an unrelated third party beginning on January 1, 2017 and expiring onDecember 31, 2018 and we expect to receive approximately $0.2 million in sublease rental income.(2)We have acquired exclusive rights to develop patented compounds and related know-how under licensing agreements for beloranib with twothird parties. The licensing rights obligate us to make payments to the licensors for license fees, milestones, license maintenance fees androyalties. We are also responsible for patent prosecution costs. We are obligated to make future milestone payments under these agreements of upto $12.3 million, upon achieving certain pre-commercialization milestones, such as clinical trials and government approvals, and up to$12.5 million upon achieving certain product commercialization milestones. In addition, under one of the license agreements, we are obligatedto pay up to $1.3 million with respect to each subsequent licensed product, if any, that is a new chemical entity. In addition, we will owe single-digit royalties on sales of commercial products developed using these licensed technologies, if any. We are obligated to pay to the licensors apercentage of fees received if and when we sublicense the technologies. As of December 31, 2017, we had not yet developed a commercialproduct using the licensed technologies and we had not entered 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, nonclinical research studies andtesting, manufacturing and other services and products for operating 82 Table of Contents purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancelable obligations underthese agreements are not material.(4)Debt commitments include principal, interest, and an 8% final payment of the amounts drawn under the Term Loan.Off-Balance Sheet ArrangementsDuring the periods presented we did not have and we do not currently have, any off-balance sheet arrangements, as defined under Securities andExchange Commission rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structuredfinance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balancesheets.Recently Issued Accounting PronouncementsPlease read Note 2 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of thisAnnual Report for a description of recent accounting pronouncements applicable to our business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKInterest Rate Fluctuation RiskOur cash, cash equivalents, and marketable securities as of December 31, 2017 consisted of cash, corporate bonds, commercial paper, certificatesof deposits and money market accounts. The primary objectives of our investment activities are to preserve principal, provide liquidity and maximizeincome without significantly increasing risk. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in thegeneral level of U.S. interest rates. If market interest rates were to increase immediately and uniformly by 50 basis points, or one-half of a percentagepoint, from levels as of December 31, 2017, the net fair value of our interest-sensitive financial instruments would have resulted in a hypotheticaldecline of $0.1 million.Foreign Currency Exchange RiskForeign currency transaction exposure results primarily from transactions with our contract research organizations, or CROs, and other providersrelated to our clinical trials that are denominated in currencies other than the functional currency of the legal entity in which the transaction is recordedby us, primarily the Australian dollar. Any transaction gains or losses resulting from currency fluctuations is recorded on a separate line in ourconsolidated statement of operations. Net foreign currency transaction gains (losses) of $0.1 million, less than $(0.1) million and $(0.1) million wererecorded for the years ended December 31, 2017, 2016 and 2015, respectively.Currently, our largest foreign currency exposures are those with respect to the Australian dollar. Relative to foreign currency exposures existingas of December 31, 2017, a 10% unfavorable movement in foreign currency exchange rates would expose us to an increased net loss. For the yearended December 31, 2017, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have increased our net loss byless than $0.1 million. This amount is based on a sensitivity analysis performed on our financial position as of December 31, 2017. We haveexperienced and will continue to experience fluctuations in our net income (loss) as a result of revaluing our assets and liabilities that are notdenominated in the functional currency of the entity that recorded the asset or liability. At this time, we do not hedge our foreign currency risk. 83 Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 85 Consolidated Balance Sheets as of December 31, 2017 and 2016 86 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015 87 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015 88 Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 89 Notes to Consolidated Financial Statements 90 84 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders ofZafgen, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Zafgen Inc., and its subsidiaries as of December 31, 2017 and 2016, and the relatedconsolidated statements of operations and comprehensive loss, of changes in stockholders’ equity and of cash flows for each of the three years in theperiod ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, theconsolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, andthe results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accountingprinciples generally accepted in the United States of America.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theCompany’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federalsecurities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financialreporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error orfraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates madeby management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonablebasis for our opinion.Emphasis of matterAs discussed in Note 1 to the consolidated financial statements, the Company will require additional financing to fund future operations and debtpayments. Management’s plans in regard to this matter are described in Note 1./s/ PricewaterhouseCoopers LLPBoston, MassachusettsMarch 9, 2018We have served as the Company’s auditor since 2013. 85 Table of ContentsPART I—FINANCIAL INFORMATIONItem 1. Financial StatementsZAFGEN, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share data) December 31, 2017 2016 Assets Current assets: Cash and cash equivalents $40,777 $32,352 Marketable securities 61,275 96,842 Tax incentive receivable 946 347 Prepaid expenses and other current assets 1,927 1,358 Total current assets 104,925 130,899 Property and equipment, net 528 661 Other assets 57 61 Total assets $105,510 $131,621 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $3,020 $2,572 Accrued expenses 4,273 3,733 Notes payable, current — 3,589 Total current liabilities 7,293 9,894 Notes payable, long-term 20,000 — Total liabilities 27,293 9,894 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock; $0.001 par value per share; 5,000,000 shares authorized as of December 31, 2017 and 2016; noshares issued and outstanding as of and December 31, 2017 and 2016 — — Common stock, $0.001 par value per share; 115,000,000 shares authorized as of December 31, 2017 and 2016;27,489,457 and 27,332,551 shares issued and outstanding as of December 31, 2017 and 2016, respectively 27 27 Additional paid-in capital 367,825 359,329 Accumulated deficit (289,577) (237,549) Accumulated other comprehensive loss (58) (80) Total stockholders’ equity 78,217 121,727 Total liabilities and stockholders’ equity $105,510 $131,621 The accompanying notes are an integral part of these consolidated financial statements. 86 Table of ContentsZAFGEN, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except share and per share data) Year Ended December 31, 2017 2016 2015 Revenue $— $— $— Operating expenses: Research and development 40,839 39,936 54,618 General and administrative 12,160 18,289 19,195 Total operating expenses 52,999 58,225 73,813 Loss from operations (52,999) (58,225) (73,813) Other income (expense): Interest income 996 894 438 Interest expense (165) (529) (806) Foreign currency transaction gains (losses), net 140 (18) (105) Total other income (expense), net 971 347 (473) Net loss (52,028) (57,878) (74,286) Net loss per share, basic and diluted $(1.90) $(2.12) $(2.78) Weighted average common shares outstanding, basic and diluted 27,433,239 27,297,934 26,756,079 Comprehensive loss: Net loss $(52,028) $(57,878) $(74,286) Other comprehensive gain (loss): Unrealized gain (loss) on marketable securities 22 127 (172) Total other comprehensive gain (loss) 22 127 (172) Total comprehensive loss $(52,006) $(57,751) $(74,458) The accompanying notes are an integral part of these consolidated financial statements. 87 Table of ContentsZAFGEN, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(In thousands, except share data) Common Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveLoss TotalStockholders’Equity Shares ParValue 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 units 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 Issuance of common stock upon exercise of stock options andemployee stock purchase plan 72,663 — 220 — — 220 Issuance of common stock 5,564 — 35 35 Issuance of restricted stock units 11,821 — — — — — Stock-based compensation expense — — 10,113 — — 10,113 Unrealized gain on marketable securities — — — — 127 127 Net loss — — — (57,878) — (57,878) Balances at December 31, 2016 27,332,551 27 359,329 (237,549) (80) 121,727 Issuance of common stock upon exercise of stock options andemployee stock purchase plan 136,992 — 195 — — 195 Issuance of restricted stock units 19,914 — — — — — Stock-based compensation expense — — 8,301 — — 8,301 Unrealized gain on marketable securities — — — — 22 22 Net loss — — — (52,028) — (52,028) Balances at December 31, 2017 27,489,457 $27 $367,825 $(289,577) $(58) $78,217 The accompanying notes are an integral part of these consolidated financial statements. 88 Table of ContentsZAFGEN, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2017 2016 2015 Cash flows from operating activities: Net loss $(52,028) $(57,878) $(74,286) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 8,301 10,113 8,582 Non-cash interest expense 13 43 62 Depreciation expense 188 212 70 Loss on disposal of research and development equipment — 328 — Unrealized foreign currency transaction (gains) losses (46) 6 82 Premium on marketable securities (359) (340) (2,036) Amortization of premium on marketable securities 246 1,037 1,243 Changes in operating assets and liabilities: Prepaid expenses and other current assets (569) 413 (363) Tax incentive receivable (553) 970 (1,014) Accounts payable 448 (4,625) 4,914 Accrued expenses 575 (2,254) 3,192 Net cash used in operating activities (43,784) (51,975) (59,554) Cash flows from investing activities: Proceeds from sales and maturities of marketable securities 150,213 188,600 195,987 Purchases of marketable securities (114,511) (136,528) (287,491) Purchases of property and equipment (55) (660) (595) Deposits for leased property — 35 (19) Net cash provided by (used in) investing activities 35,647 51,447 (92,118) Cash flows from financing activities: Proceeds from issuance of notes payable 20,000 — — Repayments of notes payable (3,633) (2,935) (1,381) Proceeds from exercise of common stock options and employee stock purchase plan 195 220 974 Proceeds from public offerings, net of commissions and underwriting discounts — — 130,044 Payments of public offering costs — — (473) Net cash provided by (used in) financing activities 16,562 (2,715) 129,164 Net increase (decrease) in cash and cash equivalents 8,425 (3,243) (22,508) Cash and cash equivalents at beginning of period 32,352 35,595 58,103 Cash and cash equivalents at end of period $40,777 $32,352 $35,595 Supplemental disclosure of non-cash investing and financing activities: Property and equipment included in accounts payable $— $— $298 Supplemental disclosure of cash flow information: Cash paid for interest $141 $388 $584 The accompanying notes are an integral part of these consolidated financial statements. 89 Table of ContentsZAFGEN, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Nature of the Business and Basis of PresentationZafgen, Inc., or the Company, was incorporated on November 22, 2005 under the laws of the State of Delaware. The Company is a clinical-stagebiopharmaceutical company leveraging its proprietary knowledge of the methionine aminopeptidase 2 (“MetAP2”) pathway to develop noveltherapies for patients affected by a range of complex metabolic diseases. Zafgen has pioneered the study of MetAP2 inhibitors in both common andrare metabolic disorders, and its current disease areas of focus are type 2 diabetes, Prader-Willi syndrome (“PWS”) and liver diseases. The company’slead product candidate is ZGN-1061, a MetAP2 inhibitor in Phase 2 clinical development with unique properties that maximize impact on metabolicparameters relevant to the treatment of type 2 diabetes and other related metabolic disorders. In January 2018, the Company announced advancementof its highly optimized MetAP2 development candidate ZGN-1258, and in the first quarter of 2018, initiated investigational new drug application(“IND”) enabling nonclinical efforts for evaluation in the treatment of people affected by PWS. The Company is subject to risks common to companiesin the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on keypersonnel, compliance with government regulations and the need to obtain additional financing. Product candidates currently under development willrequire significant additional research and development efforts, including extensive nonclinical and clinical testing and regulatory approval, prior tocommercialization. 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 research and development stage. There can be no assurance that the Company’s research anddevelopment will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any productcandidates developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if theCompany’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales.The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnologycompanies. In addition, the Company is dependent upon the services of its employees and consultants.The Company has incurred losses and negative cash flows from operations since its inception. As of December 31, 2017, the Company had anaccumulated deficit of $289.6 million. From its inception through December 31, 2017, the Company received net proceeds of $333.3 million from thesales of redeemable convertible preferred stock, the issuance of convertible promissory notes, the proceeds from its initial public offering (“IPO”) inJune 2014 and its follow-on offering in January 2015. As disclosed in Note 6 to the consolidated financial statements, the Company has a term loanwith an aggregate principal balance of $20.0 million as of December 31, 2017. The loan agreement requires that the Company maintain certainminimum liquidity at all times, which as of December 31, 2017, was approximately $21.0 million. If the minimum liquidity covenant is not met, theCompany may be required to repay the loans prior to scheduled maturity dates. Until such time, if ever, as the Company can generate substantialproduct revenue, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, collaborations, strategicalliances, licensing arrangements and other sources of funding.Based on its current operating plans, the Company believes its cash, cash equivalents and marketable securities of $102.1 million as ofDecember 31, 2017 will be sufficient to fund its anticipated level of operations, capital expenditures and satisfy debt repayments for a period of at leastone year from the issuance date of this Annual Report. If the Company is unable to raise additional funds through equity or debt financings, theCompany may be required to delay, limit, reduce or terminate product development or future commercialization efforts or grant rights to develop andmarket products or product candidates that the Company would otherwise prefer to develop and market itself. 90 Table of ContentsThe consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Zafgen Securities Corporation,Zafgen Australia Pty Limited, and Zafgen Animal Health, LLC. All intercompany balances and transactions have been eliminated.The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”).2. Summary of Significant Accounting PoliciesUse of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, andthe reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financialstatements include, but are not limited to, the accrual of research and development expenses and the valuation of stock-based awards. Estimates areperiodically reviewed in light of changes 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 cashequivalents. Cash equivalents, which consist of money market funds, U.S. government securities, corporate bonds, and commercial paper, are stated atfair value.Concentration of Credit Risk and of Significant SuppliersFinancial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents andmarketable securities. The Company has all cash, cash equivalents and marketable securities balances at three accredited financial institutions inamounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit riskassociated with commercial banking relationships.The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular,the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceuticalingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply ofactive pharmaceutical ingredients and formulated drugs.Marketable securitiesMarketable securities consist of investments with original maturities greater than ninety days. The Company has classified its investments withmaturities beyond one year as short term, based on their highly liquid nature and because such marketable securities represent the investment of cashthat is available for current operations. The Company considers its investment portfolio of investments as available-for-sale. Accordingly, theseinvestments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are reported as a component of accumulatedother comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary areincluded as a component of other income (expense), net based on the specific identification method. When determining whether a decline in value isother than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is morelikely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. Fair value is determined based onquoted market prices. 91 Table of ContentsDeferred Offering CostsThe Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings asother assets until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity as areduction of additional paid-in capital generated as a result of the offering or as a reduction to the carrying value of preferred stock issued.Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method overa five-year estimated useful life for equipment, furniture and fixtures and office equipment. Leasehold improvements are amortized over the shorter ofthe asset life or the term of the lease agreement. Expenditures for repairs and maintenance of assets are charged to expense as incurred. Upon retirementor sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included inloss 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 orchanges in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers indeciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negativeindustry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate along-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventualdisposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flowsexpected 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 ofthe impaired asset over its fair value, determined based on discounted cash flows. To date, the Company has not recorded any impairment losses onlong-lived assets.Research and Development CostsResearch and development costs are expensed as incurred. Included in research and development expenses are wages, stock-based compensationand benefits of employees, third-party license fees and milestones and other operational costs related to the Company’s research and developmentactivities, including facility-related expenses and external costs of outside vendors engaged to conduct nonclinical studies, manufacturing activities,and clinical trials. The Company records research and development expenses net of any research and development tax incentives the Company isentitled 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 andoutside of the United States. These agreements are generally cancelable, and related payments are recorded as research and development expenses asincurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Companyanalyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments andestimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.The Company’s historical accrual estimates have not been materially different from the actual costs.Patent CostsAll patent-related costs incurred in connection with filing and prosecuting patent applications are recorded as general and administrativeexpenses as incurred, as recoverability of such expenditures is uncertain. 92 Table of ContentsAccounting for Stock-Based CompensationThe Company measures all stock-based awards granted to employees and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model. Compensation expense of those awards is recognized over the requisite service period, which is generally the vestingperiod of the respective award. Typically, the Company issues awards with only service-based and market-based vesting conditions and records theexpense for these awards using the straight-line method.For stock-based awards granted to non-employee consultants, compensation expense is recognized over the period during which services arerendered by such consultants until completed. At the end of each financial reporting period prior to completion of the service, the fair value of theseawards is remeasured using the then-current fair value of the Company’s common shares and updated assumption inputs in the Black-Scholes option-pricing model.The Company classifies stock-based compensation expense in its consolidated statements of operations and comprehensive loss in the samemanner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.Income TaxesThe Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilitiesfor the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns.Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates ineffect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision forincome taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent itbelieves, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, avaluation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating thefuture taxable profits expected and considering prudent and feasible tax planning strategies.The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process todetermine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustainedupon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is thenassessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized isthe largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes theeffects of any resulting tax reserves, or unrecognized tax benefits, that are considered 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. TheCompany is a biopharmaceutical company dedicated to significantly improving the health and well-being of patients affected by both rare andprevalent metabolic diseases including type 2 diabetes, PWS and potentially other metabolically related disorders. No revenue has been generatedsince inception, and all tangible assets are held in the United States. 93 Table of ContentsComprehensive LossComprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events otherthan those with stockholders. For the years ended December 31, 2017, 2016 and 2015, the Company’s only element of other comprehensive loss wasunrealized gain or (loss) on marketable securities.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 convertedinto shares of common stock. Prior to this conversion, the Company followed the two-class method when computing net income (loss) per share as theCompany had issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for eachclass of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. Thetwo-class method requires income available to common stockholders for the period to be allocated between common and participating securities basedupon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s redeemable convertible preferredshares contractually entitled the holders of such shares to participate in dividends, but did not contractually require the holders of such shares toparticipate in losses of the Company. Accordingly, the two-class method did not apply for periods in which the Company reported a net loss or a netloss attributable to common stockholders resulting from dividends or accretion related to its redeemable convertible preferred shares.Basic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted averagenumber of common shares outstanding for the period. Diluted net income (loss) per share attributable to common stockholders is computed by dividingthe 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 treasurystock method. For periods in which the Company has reported net losses, diluted net loss per common share attributable to common stockholders is thesame as basic net loss per common share attributable to common stockholders, since dilutive common shares are not assumed to have been issued iftheir effect is antidilutive.Recently Issued and Adopted Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires acompany to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects toreceive for those goods or services. The FASB has continued to issue accounting standards updates to clarify and provide implementation guidancerelated to Revenue from Contracts with Customers, including ASU 2016-08, Revenue from Contract with Customers: Principal versus AgentConsiderations, ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12,Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. These amendments address a number of areas,including the entity’s identification of its performance obligations in a contract, collectability, non-cash consideration, presentation of sales tax and anentity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at apoint in time. The Company early adopted the standard as of January 1, 2017, however there is no impact of this new guidance on its consolidatedfinancial statements as it does not currently have any revenue generating arrangements. 94 Table of ContentsIn August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern. The new guidance addressesmanagement’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to providerelated footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable atthe date that the financial statements are issued. The standard was effective for the annual reporting period ending after December 15, 2016, and forannual and interim periods thereafter. The adoption of this guidance did not have a material impact on the Company’s consolidated financialstatements and related disclosures.In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This guidance requires companies toclassify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrentamounts. This guidance allows for adoption on either a prospective or retrospective basis and will be effective on January 1, 2017. Early adoption ispermitted. The Company elected to early adopt this guidance on December 31, 2015. The adoption of this guidance did not have a material impact onthe 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 inan entity recognizing an asset and liability equal to the present value of the lease payments in the statement of financial position. This guidance iseffective for annual periods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective transitionapproach 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.In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This standard was adopted onJanuary 1, 2017 on a modified retrospective basis. As a result, the Company has made an accounting policy election to account for forfeitures as theyoccur. The adoption of this guidance also requires excess tax benefits and tax deficiencies be recorded in the income statement as opposed toadditional paid-in capital when the awards vest or are settled. The adoption of this guidance had an immaterial impact on the Company’s consolidatedfinancial statements as of and for the year ended December 31, 2017.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. Thisguidance addresses the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The standard will beeffective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. The Company is evaluatingthe effect that this guidance will have on its consolidated financial statements.In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. This guidanceaddresses which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standardwill be effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. The Company isevaluating 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 as of December 31, 2017and 2016 and indicate the fair value of the hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined byLevel 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair value determined by Level 2 inputs utilize 95 Table of Contentsobservable inputs other than Level 1 prices, such as quoted prices, for similar assets or liabilities, quoted market prices in markets that are not active orother inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fairvalues determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, marketactivity for the asset or liability. During the years ended December 31, 2017 and 2016, there were no transfers between Level 1 and Level 2 financialassets.The following tables summarize the Company’s cash equivalents and marketable securities as of December 31, 2017 and 2016: December 31, 2017 Total QuotedPrices inActiveMarkets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) (in thousands) Cash equivalents: Money market funds $15,802 $15,802 $— $— Commercial paper 998 — 998 — Corporate bonds 549 — 549 — Total cash equivalents 17,349 15,802 1,547 — Marketable securities: Corporate bonds 50,844 — 50,844 — Commercial paper 9,951 — 9,951 — Certificates of deposit 480 — 480 — Total marketable securities 61,275 — 61,275 — Total cash equivalents and marketable securities $78,624 $15,802 $62,822 $— December 31, 2016 Total QuotedPrices inActiveMarkets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) (in thousands) Cash equivalents: Money market funds $22,091 $22,091 $— $— Commercial paper 2,997 — 2,997 — Corporate bonds 1,500 — 1,500 — Total cash equivalents 26,588 22,091 4,497 — Marketable securities: Corporate bonds 69,622 — 69,622 — Commercial paper 27,220 — 27,220 — Total marketable securities 96,842 — 96,842 — Total cash equivalents and marketable securities $123,430 $22,091 $101,339 $— The carrying amounts reflected in the consolidated balance sheets for tax incentive receivable, accounts payable, and accrued expensesapproximate fair value due to their short-term maturities. The carrying value of the Company’s outstanding notes payable approximates fair value (aLevel 2 fair value measurement), reflecting interest rates currently available to the Company. 96 Table of ContentsMarketable SecuritiesThe following tables summarize the Company’s marketable securities as of December 31, 2017 and 2016: December 31, 2017 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses Fair Value (in thousands) Assets: Corporate bonds (due within 1 year) $50,892 $— $(48) $50,844 Commercial paper (due within 1 year) 9,961 — (10) 9,951 Certificates of deposit (due within 1 year) 480 — — 480 $61,333 $— $(58) $61,275 December 31, 2016 AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses Fair Value (in thousands) Assets: Corporate bonds (due within 1 year) $68,777 $— $(54) $68,723 Corporate bonds (due after 1 year through 2 years) 901 — (2) 899 Commercial paper (due within 1 year) 27,244 — (24) 27,220 $96,922 $— $(80) $96,842 4. Property and Equipment, netProperty and equipment, net consisted of the following as of December 31, 2017 and 2016: December 31, Useful Life 2017 2016 (in thousands) Office equipment 5 years $421 $372 Furniture and fixtures 5 years 194 194 Equipment 5 years 6 — Leasehold improvements * 415 415 1,036 981 Less: Accumulated depreciation (508) (320) $528 $661 *shorter of asset life or lease termDepreciation expense was $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. 97 Table of Contents5. Accrued ExpensesAccrued expenses consisted of the following as of December 31, 2017 and 2016: December 31, 2017 2016 (in thousands) Accrued payroll and related expenses $2,229 $2,008 Accrued research and development expenses 1,647 892 Accrued professional fees 292 347 Accrued restructuring — 376 Accrued other 105 110 $4,273 $3,733 6. Notes PayableAs of December 31, 2017, the Company had fully repaid all outstanding amounts due under a loan and security agreement with Oxford FinanceLLC and Midcap Financial, or the 2014 Credit Facility, entered into in March 2014.On December 29, 2017, the Company entered into a loan and security agreement with Silicon Valley Bank (the “Term Loan”). The Term Loanprovided for borrowings of $20.0 million. On December 29, 2017, the Company received proceeds of $20.0 million from the issuance of a promissorynote. The promissory note issued under the Term Loan is collateralized by substantially all of the Company’s personal property, other than itsintellectual property.Upon entering into this Term Loan, the Company is obligated to make monthly, interest-only payments until March 29, 2019 and, thereafter, topay 33 consecutive, equal monthly installments of principal and interest from April 1, 2019 through December 1, 2021. The outstanding Term Loanbears a variable interest at an annual rate of 1.25% above the prime rate, which at December 31, 2017 was 4.5%. In addition, a final payment equal to8.0% of the Term Loan is due upon the earlier of the maturity date, acceleration of the term loans or prepayment of all or part of the term loans. TheCompany accrues the final payment amount of $1.6 million, to outstanding debt by charges to interest expense using the effective-interest methodfrom the date of issuance through the maturity date.The effective annual interest rate of the outstanding debt under the Term Loan is approximately 8.9%.Additionally, the Company, as the borrower, is required to maintain a minimum cash, cash equivalents and marketable securities balance atSilicon Valley Bank of no less than 105% of the total outstanding principal balance of the Term Loan, which as of December 31, 2017 was$21.0 million.Further, as of 45 days after the Term Loan was entered in, the Company must maintain a balance of unrestricted cash, cash equivalents andmarketable securities at Silicon Valley Bank in an amount not less than the greater of (i) $55.0 million and (ii) sixty-five percent (65%) of all theCompany’s cash, cash equivalents and marketable securities. If the Company does not meet this requirement it will not be considered an event ofdefault provided it immediately secures 87.5% of the principal balance in a restricted cash account.There are negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions; encumbering orgranting a security interest in its intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; permit theaggregate value of cash maintained by its Australian subsidiary not to exceed $4.0 million and certain other business transactions. 98 Table of ContentsThe Term Loan also includes events of default, the occurrence and continuation of any of which provides the lenders the right to exerciseremedies against the Company and the collateral securing the loans under the Term Loan, including cash in the amount of the outstanding balance.These events of default include, among other things, failure to pay any amounts due under the Term Loan, insolvency, the occurrence of a materialadverse event, the occurrence of any default under certain other indebtedness and a final judgment against the Company in an amount greater than$0.3 million.As of December 31, 2017 and 2016, notes payable consist of the following: December 31, 2017 (in thousands) Notes payable long-term $20,000 December 31, 2016 (in thousands) Notes payable 3,183 Debt discount, net of accretion (9) Accretion related to final payment 415 Notes payable, net of discount, short term $3,589 As of December 31, 2017, the estimated future principal payments due are as follows: Year Ending December 31, (in thousands) 2018 $— 2019 5,454 2020 7,273 2021 7,273 Total $20,000 During the years ended December 31, 2017, 2016 and 2015, the Company recognized $0.2 million, $0.5 million and $0.8 million, respectively,of interest expense related to the 2014 Credit Facility. The effective annual interest rate of the debt under the 2014 Credit Facility was approximately10.8%. As of December 31, 2017, interest expense incurred on the new Term Loan was immaterial.7. Stockholders’ EquityOn 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 priceof $35.00 per share. The Company received net proceeds from the follow-on offering of $130.0 million based upon the price of $35.00 per share afterdeducting underwriting discounts and commissions paid by the Company. The Company also incurred offering costs of $0.5 million related to thefollow-on offering.As of December 31, 2017 and 2016, the Company’s Certificate of Incorporation, as amended and restated, authorizes the Company to issue5,000,000 shares of $0.001 par value preferred stock. The rights, preferences, restrictions, qualifications and limitations of such stock are to bedetermined by the Company’s board of directors.As of December 31, 2017 and 2016, the Company’s Certificate of Incorporation, as amended and restated, authorizes the Company to issue115,000,000 shares of $0.001 par value common stock. 99 Table of Contents8. Stock-Based AwardsStock Option PlanThe Company’s 2014 Stock Option and Incentive Plan (the “2014 Plan”) provides for the grant of stock options, stock appreciation rights,restricted stock awards, restricted stock units, unrestricted stock awards, performance-share awards, cash-based awards and dividend equivalent rights toemployees, members of the board of directors and consultants of the Company. The number of shares initially reserved for issuance under the 2014Plan was 2,168,221 shares of common stock. The number of shares reserved for issuance may be increased by the number of shares under the previouslyauthorized 2006 Stock Option Plan that are not needed to fulfill the Company’s obligations for awards issued under the 2006 Stock Option Plan as aresult of forfeiture, expiration, cancellation, termination or net issuances of awards thereunder. The number of shares of common stock that may beissued under the 2014 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 shares ofcommon stock as of that date, or (ii) an amount determined by the board of directors. As of December 31, 2017, 1,981,060 shares are available for grantunder the 2014 Plan, including 1,093,302 shares automatically added to the 2014 Stock Option Plan on January 1, 2017.Stock Option GrantsOption Grants with time-based vesting conditionsDuring the years ended December 31, 2017, 2016 and 2015, the Company granted 1,214,874, 1,527,559 and 992,505 stock options under the2014 Plan. The vesting of these awards is time-based and the restrictions typically lapse over periods of three to four years. Stock options were grantedwith exercise prices equal to the fair value of the Company’s common stock on the date of grant. The Company bases fair value of common stock onthe quoted market price of the Company’s common stock. During the year ended December 31, 2017, the Company also granted 550,000 options withtime-based vesting restrictions to the newly-hired Chief Executive Officer as an inducement grant outside of the 2014 Plan in accordance withNASDAQ Listing Rule 5635(c)(4). These stock options have a ten-year term and an exercise price equal to the closing price of the Company’s commonstock on the grant date. The options vest as to 25% of the shares on the first anniversary of the grant date and the remainder in equal monthlyinstallments thereafter over a 3-year period.The fair value of each service-based stock option grant to employees and directors is estimated on the date of grant using the Black-Scholesoption-pricing model. The Company estimates its expected volatility using a weighted average of the historical volatility of publicly-traded peercompanies and its own common stock since its IPO in June 2014, and expects to continue to do so until such time as it has adequate historical dataregarding the volatility of its own traded stock price for the duration of the expected term. The expected term of the Company’s stock options has beendetermined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference tothe 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 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 asfollows, presented on a weighted average basis: 2017 2016 2015 Risk-free interest rate 2.10% 1.40% 1.75% Expected term (in years) 6.17 6.18 6.25 Expected volatility 93% 87% 87% Expected dividend yield 0% 0% 0% 100 Table of ContentsThe following table summarizes the Company’s stock option activity described above, since December 31, 2016: Shares IssuableUnder Options WeightedAverageExercisePrice AverageRemainingContractualTerm AggregateIntrinsicValue (in years) (in thousands) Outstanding as of December 31, 2016 3,115,003 $14.40 7.2 $1,038 Granted 1,764,874 $3.88 Exercised (93,211) $0.80 Forfeited (292,465) $20.97 Outstanding as of December 31, 2017 4,494,201 $10.12 7.8 $3,251 Options vested and expected to vest as of December 31, 2017 4,494,201 $10.12 7.8 $3,251 Options exercisable as of December 31, 2017 2,088,452 $13.44 6.4 $1,955 The aggregate intrinsic value was calculated based on the positive differences between the market value of the Company’s common stock andthe exercise prices of the options. The aggregate intrinsic value of service-based stock options exercised was $0.3 million, $0.1 million and$13.9 million during the years ended December 31, 2017, 2016 and 2015, respectively.The Company received cash proceeds from the exercise of stock options of $0.1 million, less than $0.1 million, and $0.8 million during the yearsended December 31, 2017, 2016 and 2015, respectively.The weighted average grant-date fair value of service-based stock options granted to employees and directors during the years endedDecember 31, 2017, 2016 and 2015 was $2.91, $4.86, and $28.97 per share, respectively.As of December 31, 2017 and 2016, there were outstanding unvested service-based stock options held by nonemployees for the purchase of77,567 and 6,401 shares of common stock, respectively.Option Grants with market-based vesting conditionsIn October 2017, the Company granted 687,500 common stock options that vest on the third anniversary of the grant date upon achievement bythe Company of minimum common stock prices for 20 consecutive days during the Earning Period, the (“Price Target Options”). The Earning Period isdefined as the period between the first anniversary of the grant date and the third anniversary of the grant date. Of the 687,500 Price Target Optionsgranted in 2017, 137,500 were granted under the 2014 Stock Plan and 550,000 were granted to the newly-hired Chief Executive Officer as aninducement grant outside of the 2014 Plan in accordance with NASDAQ Listing Rule 5635(c)(4). These stock options have a ten-year term and anexercise price equal to the closing price of the Company’s common stock on the grant date.The number of Price Target Options that will vest upon achievement of the target will vary based on the level of achievement from a maximum of200% of the target shares to a threshold of 50% of the target shares, with no vesting, absent certain circumstances, if the threshold requirement is notachieved or the employee is no longer with the Company at the end of the three-year period. The Price Target Options are valued using Monte Carlosimulation models. The number of options expected to vest, based on achievement of the specified market condition, is factored into the grant dateMonte Carlo valuations for the Price Target Options. Compensation expense is recognized ratably over the attribution period. 101 Table of ContentsThe assumptions that the Company used to determine the fair value of the stock options granted to employees are as follows, presented on aweighted average basis: 2017 Risk-free interest rate 2.24% Expected term (in years) 6.3 Expected volatility 94.6% Expected dividend yield 0% The total fair value of $3.1 million and a weighted average fair value of the Price Target Options was $4.56 per share. As of December 31, 2017,the entire 687,500 Price Target Options had an aggregate intrinsic value of $0.8 million and a remaining contractual term of 9.77 years remainedoutstanding.Restricted Stock UnitsThe Company has granted restricted stock units with time-based vesting conditions. The Company values restricted stock units on the grant-dateusing the market price of the Company’s common stock. The aggregate intrinsic value of restricted stock units that vested during the years endedDecember 31, 2017, 2016 and 2015 was $0.1 million per year calculated as the fair value of the Company’s common stock on the date it vests. Duringthe years ended December 31, 2017, 2016 and 2015, the Company granted 22,128, 13,273 and 4,769 restricted stock units, respectively, all of whichvested during 2017, 2016 and 2015, respectively, at a weighted average grant-date fair value of $4.18, $7.91 and $34.46, respectively. As ofDecember 31, 2017 and 2016, there were no unvested restricted stock units outstanding.2014 Employee Stock Purchase PlanThe Company has a 2014 Employee Stock Purchase Plan (the “ESPP”) under which a total of 265,000 shares of common stock were reserved forissuance. During both 2017 and 2016 there were two offering periods, January 1 through June 30 and July 1 through December 31. The per sharepurchase price for offerings is equal to the lesser of 85% of the closing market price of the Company’s common stock on the first day or last day of theoffering period. The Company issued 43,781 and 37,663 shares during the years ended December 31, 2017 and 2016, respectively. As of December 31,2017 and 2016, there are 176,016 and 219,797 shares, respectively, of common stock available for issuance to participating employees under theESPP.Stock-based CompensationThe Company recorded stock-based compensation expense related to stock options and restricted common stock in the following expensecategories within its consolidated statements of operations: Year Ended December 31, 2017 2016 2015 (in thousands) Research and development $4,138 $3,543 $2,930 General and administrative 4,163 6,390 5,652 $ 8,301 $ 9,933 $ 8,582 In addition, during the year ended December 31, 2016, in connection with its strategic restructuring further discussed in Note 14, the Companyrecorded a one-time, non-cash stock option modification expense of $0.2 million, which is included in the stock-based compensation expense lineitems of both the consolidated statements of cash flows and the consolidated statements of changes in stockholders’ equity. 102 Table of ContentsAs of December 31, 2017, the Company had unrecognized stock-based compensation expense related to its unvested service-based stock optionawards of $10.7 million, which is expected to be recognized over the remaining weighted average vesting period of 2.54 years.As of December 31, 2017, the Company had unrecognized stock-based compensation expense related to its unvested market-based stock optionawards of $3.1 million, which is expected to be recognized over the remaining weighted average vesting period of 2.77 years.9. Net Loss Per ShareBasic and diluted net loss per share was calculated as follows: Year Ended December 31, 2017 2016 2015 (in thousands, except per share data) Basic and diluted net loss per share: Numerator: Net loss $(52,028) $(57,878) $(74,286) Denominator: Weighted average common shares outstanding, basic and diluted 27,433,239 27,297,934 26,756,079 Net loss per share, basic and diluted $(1.90) $(2.12) $(2.78) The Company excluded the following common stock equivalents, outstanding as of December 31, 2017, 2016 and 2015, from the computationof diluted net loss per share for the years ended December 31, 2017, 2016 and 2015 because they had an anti-dilutive impact due to the net lossincurred for the periods: As of December 31, 2017 2016 2015 Options to purchase common stock 4,494,201 3,115,003 2,555,110 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 anoption to extend the lease for three additional years. In March 2015, the Company entered into an operating lease for additional office space in Boston,Massachusetts, effective as of April 15, 2015, with a term expiring on July 31, 2017, and two options to extend this lease for three additional yearseach. In January 2017, the Company extended the leases for both office spaces in Boston, Massachusetts with new terms expiring on July 31, 2020. Inaddition, with the landlord’s consent, the Company has subleased 2,976 square feet of office space in Boston, Massachusetts to an unrelated third partybeginning on January 1, 2017 and expiring on December 31, 2018, and the Company expects to receive approximately $0.2 million in sublease rentalincome. In October 2015, the Company entered into an operating lease for office space in San Diego, California, effective as of October 1, 2015, with aterm expiring on September 30, 2019, and an option to extend this lease for five additional years. 103 Table of ContentsFuture minimum lease payments for its operating leases as of December 31, 2017 were as follows: Year Ending December 31, (in thousands) 2018 $479 2019 464 2020 226 2021 — $1,169 During the years ended December 31, 2017, 2016 and 2015, the Company recognized $0.3 million, $0.4 million and $0.3 million, respectively,of rental expense related to office space.Intellectual Property LicensesThe Company has acquired exclusive rights to develop patented compounds and related know-how for beloranib under two licensing agreementswith two third parties in the course of its research and development activities. The licensing rights obligate the Company to make payments to thelicensors for license fees, milestones, license maintenance fees and royalties. The Company is also responsible for patent prosecution costs.As of December 31, 2017, the Company is obligated to make additional milestone payments of up to $12.3 million upon reaching certainpre-commercialization milestones, such as clinical trials and government approvals (including the U.S. Food and Drug Administration, or FDA,approval of a New Drug application, or NDA), and up to $12.5 million upon reaching certain product commercialization milestones related to thedevelopment of beloranib. Under one of the license agreements, the Company is also obligated to pay up to $1.3 million with respect to eachsubsequent licensed product, if any, that is a new chemical entity. In addition, the Company will owe single-digit royalties on sales of commercialproducts developed using these licensed technologies, if any.There were no milestones achieved during the years ended December 31, 2017, 2016 or 2015. The Company is also obligated to pay to thelicensors a percentage of fees received if and when the Company sublicenses the technology. As of December 31, 2017, the Company has not yetdeveloped a commercial product using the licensed technologies and it has not entered into any sublicense 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 other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectualproperty infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members ofmanagement team and the board of directors of the Company that will require the Company, among other things, to indemnify them against certainliabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Companycould be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any materialcosts as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will havea material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in itsconsolidated financial statements as of December 31, 2017.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 theCompany can reasonably estimate the amount of the loss. The Company 104 Table of Contentsreviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. Tothe extent new information is obtained and the views on the probable outcomes of claims, suits, assessments, investigations or legal proceedingschange, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made. In addition, in accordancewith 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 thateffect. The Company 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. Anamended complaint was filed on February 22, 2016. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities ExchangeAct of 1934 and SEC Rule 10b-5 based on allegedly false and misleading statements and omissions regarding the Company’s clinical trials for its drugbeloranib. On August 9, 2016, the District Court granted the motion to dismiss and dismissed the amended complaint with prejudice. On August 12,2016, plaintiffs filed a notice of appeal to the First Circuit Court of Appeals and on April 7, 2017, the dismissal with prejudice was affirmed.The Company may periodically become subject to other legal proceedings and claims arising in connection with ongoing business activities,including claims 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 above action, the Company is not aware of any other material claims as of December 31, 2017.11. Income TaxesDuring the years ended December 31, 2017, 2016 and 2015, the Company recorded no income tax benefits for the net operating losses incurredin each year due to its uncertainty of realizing a benefit from those items.The domestic and foreign components of loss before income taxes are as follows: 2017 2016 2015 (in thousands) Domestic $(49,954) $(57,799) $(72,147) Foreign (2,074) (79) (2,139) Loss before income taxes $(52,028) $(57,878) $(74,286) 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, 2017 2016 2015 Federal statutory income tax rate (34.0%) (34.0%) (34.0%) Federal and state research and development tax credit (4.1) (2.9) (3.9) State taxes, net of federal benefit (2.4) (3.9) (3.9) Orphan drug tax credit 0.0 (1.3) (3.5) Stock compensation expense 1.5 0.7 0.9 Nondeductible Australia research and development expenses 1.4 0.0 1.0 Impact of federal rate change related to tax reform 65.2 0.0 0.0 Other items 1.2 1.3 0.1 Change in deferred tax asset valuation allowance (28.8) 40.1 43.3 Effective income tax rate 0.0% 0.0% 0.0% 105 Table of ContentsNet deferred tax assets as of December 31, 2017 and 2016 consisted of the following: December 31, 2017 2016 (in thousands) Noncurrent deferred tax assets: Capitalized research and development expenses 49,325 59,489 Net operating loss carryforwards 13,848 14,991 Tax credit carryforwards 16,759 14,297 Capitalized legal expenses 1,646 2,119 Stock-based compensation 5,568 6,027 Accrued expenses 522 783 Other temporary differences 13 14 Total noncurrent deferred tax assets 87,681 97,720 Total gross deferred tax assets 87,681 97,720 Valuation allowance (87,681) (97,720) Net deferred tax assets $— $— Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2017, 2016 and 2015 related primarily tochanges in net operating loss carryforwards, capitalized research and development expenses and tax credit carryforwards and were as follows: Year Ended December 31, 2017 2016 2015 (in thousands) Valuation allowance as of beginning of year $97,720 $74,541 $42,398 Decreases recorded as benefit to income tax provision (10,039) — — Increases recorded to income tax provision — 23,179 32,143 Valuation allowance as of end of year $87,681 $97,720 $74,541 As of December 31, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of $54.0 million and$39.6 million, respectively, which begin to expire in 2026 and 2030, respectively. As of December 31, 2017, the Company also had available taxcredit carryforwards for federal and state income tax purposes of $14.8 million and $2.4 million, respectively, which begin to expire in 2026 and 2021,respectively. Utilization of the net operating loss carryforwards and tax credit carryforwards may be subject to a substantial annual limitation underSection 382 of the Internal Revenue Code of 1986 due to ownership changes that have occurred previously or that could occur in the future. Theseownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income.On January 1, 2017 the Company adopted new accounting guidance released in March 2016 that updates the accounting for certain aspects ofshare-based payments to employees, including the income tax consequences, classification of awards as either equity or liabilities, and classificationon the consolidated statement of cash flows. On January 1, 2017, the deferred tax assets associated with federal and state net operating losscarryforwards and the capitalized research and development expense increased in the amounts of $9.4 million, $7.2 million and $3.4 million,respectively, offset by valuation allowance. The adoption of this standard did not impact the Company’s consolidated financial statements.In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or publicgroups in the stock of a corporation by more than 50% over a three-year period. The Company has not conducted a study to assess whether a change ofcontrol has occurred or 106 Table of Contentswhether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If theCompany has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating losscarryforwards or tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying thevalue of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additionaladjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or tax credit carryforwards beforeutilization. Further, until a study is completed and any limitation is known, no amounts are being presented as an uncertain tax position.As of December 31, 2017 and 2016, the Company’s gross deferred tax asset balance of $87.7 million and $97.7 million, respectively, wascomprised principally of net operating loss carryforwards, capitalized research and development expenses and tax credit carryforwards. During theyears ended December 31, 2017, 2016 and 2015, gross deferred tax assets (decreased) increased due to additional net operating loss carryforwards,research and development tax credits generated and additional research and 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 hasconsidered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation ofany revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of thedeferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2017 and 2016.Management reevaluates the positive and negative evidence at each reporting period.The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2017 or 2016.The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, theCompany is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending income tax examinations. TheCompany’s tax years are still open under statute from 2013 to the present. Earlier years may be examined to the extent that tax credit or net operatingloss carryforwards are used in future periods. The Company’s policy is to record interest and penalties related to income taxes as part of its income taxprovision.On December 22, 2017, the Tax Cuts and Jobs Act ( “TCJA”) was signed into United States law. The TCJA includes a number of changes toexisting tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from a top marginal rate of 34% downto a flat rate of 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of annual taxable income andelimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such netoperating losses may be carried forward indefinitely).As a result of the TCJA, the Company was required to revalue deferred tax assets and liabilities at 21%. This revaluation resulted in a provision of$33.8 million to income tax expense in continuing operations and a corresponding reduction in the valuation allowance. There was no impact to theCompany’s consolidated statements of operations and comprehensive loss as a result of the reduction in rates. The other provisions of the TCJA did nothave a material impact on the Company’s consolidated financial statements. In accordance with authoritative guidance issued by the Securities andExchange Commission (“SEC”), the income tax effect of the TCJA represent provisional amounts for which the Company’s accounting is incompletebut for which reasonable estimates were determined and recorded during the fourth quarter of 2017. The guidance provides for a measurement period,up to one year from the enactment date, in which provisional amounts may be adjusted when additional information is obtained, prepared andanalyzed. Adjustments to provisional amounts identified during the measurement period will be recorded during fiscal year 2018 to reflect any suchguidance provided. 107 Table of Contents12. Retirement PlanThe Company has a Savings Incentive Match Plan, or SIMPLE IRA, for employees. Under the terms of the plan, the Company contributes 2% ofan employee’s annual base salary, up to a maximum of the annual Internal Revenue Service compensation limits, for all full-time employees. TheCompany terminated this plan as of December 31, 2017 and implemented a new 401(k) plan in 2018.During the years ended December 31, 2017, 2016 and 2015, the Company recognized $0.1 million, $0.2 million and $0.1 million, respectively,of expense related to its contributions to 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 ofthe Company, is eligible to receive a 43.5% refundable tax incentive for qualified research and development activities. For the years endedDecember 31, 2017, 2016 and 2015, $0.9 million, $0.3 million and $1.4 million, respectively, were recorded as a reduction to research anddevelopment expenses in the consolidated statements of operations. These amounts represented 43.5% for 2017 and 45% for 2016 and 2015, of theCompany’s qualified research and development spending in Australia. The refund is denominated in Australian dollars and, therefore, the relatedreceivable is re-measured into U.S. dollars as of each reporting date. For the years ended December 31, 2017, 2016 and 2015, the Company recorded inits consolidated statements of operations unrealized foreign currency exchange gains (losses) of less than $0.1 million, less than $(0.1) million and$(0.1) million, respectively, related to this tax incentive receivable. As of December 31, 2017 and 2016, the Company’s tax incentive receivable fromthe Australian government was $0.9 million and $0.3 million, respectively.14. RestructuringOn July 19, 2016, the Company announced that following a comprehensive review of its assets and clinical programs, as well as feedback fromregulatory authorities, the Company refocused its resources on development of a differentiated second-generation MetAP2 inhibitor, ZGN-1061. Aspart of the strategic restructuring, the Company reorganized its operations to align with its new priorities focused on ZGN-1061 development. TheCompany’s workforce was reduced by approximately 31% as of December 2016.During the year ended December 31, 2016, the Company recorded $1.4 million of restructuring-related costs in operating expense, includingemployee severance, benefits and related costs, as well as a stock option modification. The stock option modification was a one-time, non-cashexpense of $0.2 million and is included in the stock-based compensation expense line items of both the consolidated statements of cash flows and theconsolidated statements of changes in stockholders’ equity as of December 31, 2016. The Company does not expect to incur any additional significantcosts associated with this restructuring.The following table summarizes the restructuring costs by category for the periods indicated: Year Ended December 31, 2016 (in thousands) Cash Non-cash Total Research and development $455 $7 $462 General and administrative 768 173 941 $1,223 $180 $1,403 108 Table of ContentsThe following table summarizes the restructuring reserve for the periods indicated: Year Ended December 31, 2017 2016 (in thousands) Restructuring reserve beginning balance $376 $— Restructuring expenses incurred during the period 24 1,223 Amounts paid during the period (400) (847) Restructuring reserve ending balance $— $376 15. Quarterly Financial Data (Unaudited)The following information has been derived from unaudited consolidated financial statements that, in the opinion of management, include allrecurring adjustments necessary for a fair statement of such information. Three Months Ended March 31, June 30, September 30, December 31, 2017 2017 2017 2017 (in thousands, except per share data) Revenue $— $— $— $— Operating expenses 13,265 13,536 12,840 13,358 Net loss (13,011) (13,347) (12,585) (13,085) Net loss per share, basic and diluted $(0.48) $(0.49) $(0.46) $(0.48) Weighted average common sharesoutstanding, basic and diluted 27,350,673 27,407,408 27,483,550 27,489,397 Three Months Ended March 31, June 30, September 30, December 31, 2016 2016 2016 2016 (in thousands, except per share data) Revenue $— $— $— $— Operating expenses 17,857 15,062 14,831 10,475 Net loss (17,736) (15,028) (14,675) (10,439) Net loss per share, basic and diluted $(0.65) $(0.55) $(0.54) $(0.38) Weighted average common sharesoutstanding, basic and diluted 27,263,435 27,272,225 27,322,907 27,332,515 109 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 reasonableassurance that they will meet their objectives. Under the supervision and with the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2017, of the design and operation of ourdisclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principalexecutive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periodsspecified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate to allow timely decisions regarding required 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 the Exchange Act. Our internal control system is designed to provide reasonable assurance to the Company’s management and board of directorsregarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, haveinherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financialstatement preparation and presentation.Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making thisassessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its2013 Internal Control—Integrated Framework. Based on this assessment, our management has concluded that as of December 31, 2017 our internalcontrol over financial reporting is effective.As an Emerging Growth Company, as defined under the terms of the Jobs Act of 2012, our independent registered accounting firm is not requiredto issue an attestation 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 fourth quarter of the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internalcontrol over financial reporting.ITEM 9B. OTHER INFORMATIONNone. 110 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 Regulation14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscalyear ended December 31, 2017.ITEM 11. EXECUTIVE COMPENSATIONThe information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscalyear ended December 31, 2017.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscalyear ended December 31, 2017.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 Regulation14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscalyear ended December 31, 2017.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 Regulation14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscalyear ended December 31, 2017. 111 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 84 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.The exhibits listed in the accompanying index to exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.ITEM 16. FORM 10-K SUMMARYNone.EXHIBIT INDEX Exhibit No. Description 3.1 Ninth Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect (incorporated by reference toExhibit 3.1 of 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 theRegistrant’s Form 8-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 onForm S-1 (File No. 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 datedNovember 25, 2013 (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1 (FileNo. 333-195391) filed on June 18, 2014)10.1# Amended and Restated 2006 Stock Option Plan and forms of award agreements thereunder (incorporated by reference to Exhibit10.1 of the Registrant’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 ofthe Registrant’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, datedJuly 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) 112 Table of ContentsExhibit No. Description10.3(b) Amendment No. 4 to Exclusive License Agreement by and between the Registrant and Chong Kun Dang PharmaceuticalCorporation, dated October 29, 2014 (incorporated by reference to Exhibit 10.3(b) of the Registrant’s Registration Statement onForm 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 January 12, 2015)10.5 Letter by and between the Registrant and Thomas E. Hughes, dated July 25, 2008 (incorporated by reference to Exhibit 10.5 ofthe Registrant’s Registration Statement on Form S-1 (File No. 333-195391) filed on June 18, 2014)10.6 Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement by and between the Registrant andThomas E. Hughes, dated July 29, 2008 (incorporated by reference to Exhibit 10.6 of the Registrant’s Registration Statement onForm 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 ofthe Registrant’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 andDennis D. Kim, dated August 29, 2013 (incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement onForm 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 10.9of the Registrant’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 andPatricia L. Allen, dated August 29, 2013 (incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statementon 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 toExhibit 10.11(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 toExhibit 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 RegistrationStatement on Form S-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 amended January 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 referenceto Exhibit 10.14 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 Exhibit10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36510) filed on May 14, 2015) 113 Table of ContentsExhibit No. Description10.16# 2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.15 of the Registrant’s Registration Statement onForm S-1 (File No. 333-195391) filed on June 18, 2014)10.17 Severance and Change in Control Agreement by and between the Registrant and Thomas E. Hughes, PhD. dated as of June 30,2016 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36510) filed onAugust 5, 2016)10.18 Severance and Change in Control Agreement by and between the Registrant and Patricia Allen dated as of June 30, 2016(incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36510) filed onAugust 5, 2016)10.19 Severance and Change in Control Agreement by and between the Registrant and Dennis Kim, M.D., M.B.A. dated as of June 30,2016 (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36510) filed onAugust 5, 2016)10.20 Loan and Security Agreement between the Registrant, as borrower, and Silicon Valley Bank, as lender dated December 29, 2017(incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (File No. 001-36510) filed January 5, 2018)10.21 Employment Offer Letter Agreement by and between the Registrant and Jeffrey S. Hatfield, effective as of October 9, 2017(incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (File No. 001-36510) filed on October 12, 2017)10.22 Severance and Change in Control Agreement by and between Registrant and Jeffrey S. Hatfield, effective as of October 9, 2017(incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K (File No. 001-36510) filed on October 12, 2017)10.23#* Non-Qualified Stock Option Agreement Inducement Award by and between Registrant and Jeffrey S. Hatfield granted onOctober 9, 201710.24#* Non-Qualified Stock Option Agreement Inducement Award by and between Registrant and Jeffrey S. Hatfield granted onOctober 9, 201710.25* Waiver to Financing Condition by and between Registrant and Jeffrey S. Hatfield, effective as of December 29, 201716.1 Letter of Edelstein and Company LLP (incorporated by reference to Exhibit 16.1 of the Registrant’s Registration Statement onForm S-1 (File No. 333-201439) filed on January 12, 2015)21.1 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 April 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,as adopted 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,as adopted 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 adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 114 Table of ContentsExhibit No. Description101* Interactive Data Files regarding (a) our Consolidated Balance Sheets as of December 31, 2017 and 2016, (b) our ConsolidatedStatements of Operations and Comprehensive Loss for the Years Ended December 31, 2017, 2016 and 2015, (c) ourConsolidated Statements of Changes in Stockholders’ Equity, (d) our Consolidated Statements of Cash Flows for the YearsEnded December 31, 2017, 2016 and 2015 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 forwhich confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.#Represents management compensation plan. 115 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 signedon its behalf by the undersigned, thereunto duly authorized. ZAFGEN, INC.Date: March 9, 2018 By: /s/ Jeffrey HatfieldJeffrey Hatfield Chief Executive Officer(Principal Executive Officer)Date: March 9, 2018 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 theregistrant and in the capacities and on the dates indicated. Name Title Date/s/ Jeffrey HatfieldJeffrey Hatfield Chief Executive Officer andDirector(Principal Executive Officer) March 9, 2018/s/ Patricia L. AllenPatricia L. Allen Chief Financial Officer(Principal Financial andAccounting Officer) March 9, 2018/s/ Peter Barrett, Ph.D.Peter Barrett, Ph.D. Chairman of the Board of Directors March 9, 2018/s/ Bruce Booth, Ph.D.Bruce Booth, Ph.D. Director March 9, 2018/s/ Thomas O. Daniel, M.D.Thomas O. Daniel, M.D. Director March 9, 2018/s/ Frances K. HellerFrances K. Heller Director March 9, 2018/s/ Thomas E. Hughes, Ph.D.Thomas E. Hughes, Ph.D. President and Chief Scientific Officerand Director March 9, 2018/s/ John L. LaMattina, Ph.D.John L. LaMattina, Ph.D. Director March 9, 2018/s/ Cameron Geoffrey McDonough, M.D.Cameron Geoffrey McDonough, M.D. Director March 9, 2018/s/ Robert J. PerezRobert J. Perez Director March 9, 2018/s/ Frank E. ThomasFrank E. Thomas Director March 9, 2018 116 Exhibit 10.23NON-QUALIFIED STOCK OPTION AGREEMENTINDUCEMENT AWARD Name of Optionee: Jeffrey Hatfield No. of Option Shares: 1,100,000 Option Exercise Price per Share: $3.40 Grant Date: October 9, 2017 Expiration Date: October 8, 2027 Zafgen, Inc. (the “Company”) hereby grants to the Optionee named above an option (the “Stock Option”) to purchase on or prior to the Expiration Datespecified above all or part of the number of shares of Common Stock, par value $0.001 per share (the “Stock”) of the Company specified above at the OptionExercise Price per Share specified above subject to the terms and conditions set forth herein. This Stock Option has been granted as an inducement pursuantto Rule 5635(c)(4) of the Marketplace Rules of the Nasdaq Stock Market, Inc. This Stock Option is not intended to be an “incentive stock option” underSection 422 of the Internal Revenue Code of 1986, as amended. Capitalized terms used, but not defined herein, shall have the meanings given to such termsin the employment offer letter, by and between the Company and the Optionee, dated as of October 3, 2017, as the same may be amended or restated fromtime to time.1. Exercisability Schedule. No portion of this Stock Option may be exercised until such portion shall have become exercisable as set forth in ScheduleA. Except as set forth on Schedule A attached hereto, and subject to the discretion of the Company’s Board of Directors or the Compensation Committeethereof (the “Administrator”) to accelerate the exercisability schedule hereunder, this Stock Option shall be exercisable with respect to Option Shares so longas Optionee remains an employee of the Company or a subsidiary thereof on the dates when such Option Shares are earned.Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date.2. Manner of Exercise.(a) The Optionee may exercise this Stock Option only in the following manner: from time to time on or prior to the Expiration Date of this StockOption, the Optionee may give written notice to the Company of his election to purchase some or all of the Option Shares purchasable at the time of suchnotice. This notice shall specify the number of Option Shares to be purchased. Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check orother instrument acceptable to the Company; (ii) through the delivery (or attestation to the ownership) of shares of the Company’s common stock (the“Stock”) that have been purchased by the Optionee on the open market or that are beneficially owned by the Optionee and are not then subject to anyrestrictions under any Company plan and that otherwise satisfy any holding periods as may be required by the Company; (iii) by the Optionee delivering tothe Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a checkpayable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price asso provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as theCompany shall prescribe as a condition of such payment procedure; (iv) by a “net exercise” arrangement pursuant to which the Company will reduce thenumber of shares of Stock issuable upon exercise by the largest whole number of shares with a fair market value that does not exceed the aggregate exerciseprice; or (v) a combination of (i), (ii), (iii) and (iv) above. Payment instruments will be received subject to collection.The transfer to the Optionee on the records of the Company or of the transfer agent of the Option Shares will be contingent upon (i) the Company’sreceipt from the Optionee of the full purchase price for the Option Shares, as set forth above, and (ii) the fulfillment of any other requirements containedherein or in any other agreement or provision of laws. In the event the Optionee chooses to pay the purchase price by previously-owned shares of commonstock through the attestation method, the number of shares of common stock transferred to the Optionee upon the exercise of the Stock Option shall be net ofthe shares attested to.(b) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to the Optionee on the records of the Company or of thetransfer agent upon compliance to the satisfaction of the Company with all requirements under applicable laws or regulations in connection with suchtransfer and with the requirements hereof. The determination of the Company as to such compliance shall be final and binding on the Optionee. The Optioneeshall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Stock subject to this Stock Option unless anduntil this Stock Option shall have been exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred the shares to theOptionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall havefull voting, dividend and other ownership rights with respect to such shares of Stock.(c) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be 100 shares, unless thenumber of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at thetime.(d) Notwithstanding any other provision hereof, no portion of this Stock Option shall be exercisable after the Expiration Date hereof. 2 3. Termination of Employment. If the Optionee’s employment by the Company or a subsidiary thereof is terminated, the period within which toexercise the Stock Option may be subject to earlier termination as set forth below.(a) Termination Due to Death. If the Optionee’s employment terminates by reason of the Optionee’s death, any portion of this Stock Optionoutstanding on such date, to the extent exercisable on the date of death, may thereafter be exercised by the Optionee’s legal representative or legatee for aperiod of 12 months from the date of death or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of deathshall terminate immediately and be of no further force or effect.(b) Termination Due to Disability. If the Optionee’s employment terminates by reason of the Optionee’s Disability, any portion of this StockOption outstanding on such date, to the extent exercisable on the date of such Disability, may thereafter be exercised by the Optionee for a period of 12months from the date of Disability or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of Disabilityshall terminate immediately and be of no further force or effect.(c) Other Termination. If the Optionee’s employment terminates for any reason other than the Optionee’s Death, or the Optionee’s Disability, andunless otherwise determined by the Administrator, any portion of this Stock Option outstanding on such date may be exercised, to the extent exercisable onthe date of termination, for a period of three months from the date of termination or until the Expiration Date, if earlier. Any portion of this Stock Option thatis not exercisable on the date of termination shall terminate immediately and be of no further force or effect.4. Transferability. This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law orotherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee’s lifetime, only by the Optionee,and thereafter, only by the Optionee’s legal representative or legatee.5. Tax Withholding. The Optionee shall, not later than the date as of which the exercise of this Stock Option becomes a taxable event for Federalincome tax purposes, pay to the Company or make arrangements satisfactory to the Company for payment of any Federal, state, and local taxes required bylaw to be withheld on account of such taxable event. The Company shall have the authority to cause the minimum required tax withholding obligation to besatisfied, in whole or in part, by withholding from shares of Stock to be issued to the Optionee a number of shares of Stock with an aggregate fair market valuethat would satisfy the minimum withholding amount due.6. No Obligation to Continue Employment. Neither the Company nor any subsidiary thereof is obligated by or as a result of this Agreement to continuethe Optionee in employment and this Agreement shall not interfere in any way with the right of the Company or any subsidiary to terminate the employmentof the Optionee at any time. 3 7. Integration. This Agreement constitutes the entire agreement between the parties with respect to this Stock Option and supersedes all prioragreements and discussions between the parties concerning such subject matter.8. Data Privacy Consent. In order to administer this Agreement and to implement or structure future equity grants, the Company, its subsidiaries andaffiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited toSocial Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for theadministration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Optionee (i) authorizes the Company tocollect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Optionee may have with respectto the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transferof the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Optionee shall have access to, and the right tochange, the Relevant Information. Relevant Information will only be used in accordance with applicable law.9. Notices. Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to theOptionee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing. ZAFGEN, INC.By: /s/ Patricia Allen Name: Patricia AllenThe foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of thisAgreement pursuant to the Company’s instructions to the Optionee (including through an online acceptance process) is acceptable. Dated: October 9, 2017 /s/ Jeffrey Hatfield Jeffrey Hatfield 4 Schedule AVesting Terms[Omitted] 5 Exhibit 10.24NON-QUALIFIED STOCK OPTION AGREEMENTINDUCEMENT AWARD Name of Optionee: Jeffrey HatfieldNo. of Option Shares: 550,000Option Exercise Price per Share: $3.40Grant Date: October 9, 2017Expiration Date: October 8, 2027Zafgen, Inc. (the “Company”) hereby grants to the Optionee named above an option (the “Stock Option”) to purchase on or prior to the Expiration Datespecified above all or part of the number of shares of Common Stock, par value $0.001 per share (the “Stock”) of the Company specified above at the OptionExercise Price per Share specified above subject to the terms and conditions set forth herein. This Stock Option has been granted as an inducement pursuantto Rule 5635(c)(4) of the Marketplace Rules of the Nasdaq Stock Market, Inc. This Stock Option is not intended to be an “incentive stock option” underSection 422 of the Internal Revenue Code of 1986, as amended. Capitalized terms used, but not defined herein, shall have the meanings given to such termsin the employment offer letter, by and between the Company and the Optionee, dated as of October 3, 2017, as the same may be amended or restated fromtime to time.1. Exercisability Schedule. No portion of this Stock Option may be exercised until such portion shall have become exercisable as set forth in ScheduleA. Except as set forth on Schedule A attached hereto, and subject to the discretion of the Company’s Board of Directors or the Compensation Committeethereof (the “Administrator”) to accelerate the exercisability schedule hereunder, this Stock Option shall be exercisable with respect to Option Shares so longas Optionee remains an employee of the Company or a subsidiary thereof on the dates when such Option Shares are earned.Once exercisable, this Stock Option shall continue to be exercisable at any time or times prior to the close of business on the Expiration Date.2. Manner of Exercise.(a) The Optionee may exercise this Stock Option only in the following manner: from time to time on or prior to the Expiration Date of this StockOption, the Optionee may give written notice to the Company of his election to purchase some or all of the Option Shares purchasable at the time of suchnotice. This notice shall specify the number of Option Shares to be purchased. Payment of the purchase price for the Option Shares may be made by one or more of the following methods: (i) in cash, by certified or bank check orother instrument acceptable to the Company; (ii) through the delivery (or attestation to the ownership) of shares of the Company’s common stock (the“Stock”) that have been purchased by the Optionee on the open market or that are beneficially owned by the Optionee and are not then subject to anyrestrictions under any Company plan and that otherwise satisfy any holding periods as may be required by the Company; (iii) by the Optionee delivering tothe Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a checkpayable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price asso provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as theCompany shall prescribe as a condition of such payment procedure; (iv) by a “net exercise” arrangement pursuant to which the Company will reduce thenumber of shares of Stock issuable upon exercise by the largest whole number of shares with a fair market value that does not exceed the aggregate exerciseprice; or (v) a combination of (i), (ii), (iii) and (iv) above. Payment instruments will be received subject to collection.The transfer to the Optionee on the records of the Company or of the transfer agent of the Option Shares will be contingent upon (i) the Company’sreceipt from the Optionee of the full purchase price for the Option Shares, as set forth above, and (ii) the fulfillment of any other requirements containedherein or in any other agreement or provision of laws. In the event the Optionee chooses to pay the purchase price by previously-owned shares of commonstock through the attestation method, the number of shares of common stock transferred to the Optionee upon the exercise of the Stock Option shall be net ofthe shares attested to.(b) The shares of Stock purchased upon exercise of this Stock Option shall be transferred to the Optionee on the records of the Company or of thetransfer agent upon compliance to the satisfaction of the Company with all requirements under applicable laws or regulations in connection with suchtransfer and with the requirements hereof. The determination of the Company as to such compliance shall be final and binding on the Optionee. The Optioneeshall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Stock subject to this Stock Option unless anduntil this Stock Option shall have been exercised pursuant to the terms hereof, the Company or the transfer agent shall have transferred the shares to theOptionee, and the Optionee’s name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall havefull voting, dividend and other ownership rights with respect to such shares of Stock.(c) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be 100 shares, unless thenumber of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at thetime.(d) Notwithstanding any other provision hereof, no portion of this Stock Option shall be exercisable after the Expiration Date hereof. 2 3. Termination of Employment. If the Optionee’s employment by the Company or a subsidiary thereof is terminated, the period within which toexercise the Stock Option may be subject to earlier termination as set forth below.(a) Termination Due to Death. If the Optionee’s employment terminates by reason of the Optionee’s death, any portion of this Stock Optionoutstanding on such date, to the extent exercisable on the date of death, may thereafter be exercised by the Optionee’s legal representative or legatee for aperiod of 12 months from the date of death or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of deathshall terminate immediately and be of no further force or effect.(b) Termination Due to Disability. If the Optionee’s employment terminates by reason of the Optionee’s Disability, any portion of this StockOption outstanding on such date, to the extent exercisable on the date of such Disability, may thereafter be exercised by the Optionee for a period of 12months from the date of Disability or until the Expiration Date, if earlier. Any portion of this Stock Option that is not exercisable on the date of Disabilityshall terminate immediately and be of no further force or effect.(c) Other Termination. If the Optionee’s employment terminates for any reason other than the Optionee’s Death, or the Optionee’s Disability, andunless otherwise determined by the Administrator, any portion of this Stock Option outstanding on such date may be exercised, to the extent exercisable onthe date of termination, for a period of three months from the date of termination or until the Expiration Date, if earlier. Any portion of this Stock Option thatis not exercisable on the date of termination shall terminate immediately and be of no further force or effect.4. Transferability. This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law orotherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee’s lifetime, only by the Optionee,and thereafter, only by the Optionee’s legal representative or legatee.5. Tax Withholding. The Optionee shall, not later than the date as of which the exercise of this Stock Option becomes a taxable event for Federalincome tax purposes, pay to the Company or make arrangements satisfactory to the Company for payment of any Federal, state, and local taxes required bylaw to be withheld on account of such taxable event. The Company shall have the authority to cause the minimum required tax withholding obligation to besatisfied, in whole or in part, by withholding from shares of Stock to be issued to the Optionee a number of shares of Stock with an aggregate fair market valuethat would satisfy the minimum withholding amount due.6. No Obligation to Continue Employment. Neither the Company nor any subsidiary thereof is obligated by or as a result of this Agreement to continuethe Optionee in employment and this Agreement shall not interfere in any way with the right of the Company or any subsidiary to terminate the employmentof the Optionee at any time. 3 7. Integration. This Agreement constitutes the entire agreement between the parties with respect to this Stock Option and supersedes all prioragreements and discussions between the parties concerning such subject matter.8. Data Privacy Consent. In order to administer this Agreement and to implement or structure future equity grants, the Company, its subsidiaries andaffiliates and certain agents thereof (together, the “Relevant Companies”) may process any and all personal or professional data, including but not limited toSocial Security or other identification number, home address and telephone number, date of birth and other information that is necessary or desirable for theadministration of the Plan and/or this Agreement (the “Relevant Information”). By entering into this Agreement, the Optionee (i) authorizes the Company tocollect, process, register and transfer to the Relevant Companies all Relevant Information; (ii) waives any privacy rights the Optionee may have with respectto the Relevant Information; (iii) authorizes the Relevant Companies to store and transmit such information in electronic form; and (iv) authorizes the transferof the Relevant Information to any jurisdiction in which the Relevant Companies consider appropriate. The Optionee shall have access to, and the right tochange, the Relevant Information. Relevant Information will only be used in accordance with applicable law.9. Notices. Notices hereunder shall be mailed or delivered to the Company at its principal place of business and shall be mailed or delivered to theOptionee at the address on file with the Company or, in either case, at such other address as one party may subsequently furnish to the other party in writing. ZAFGEN, INC. By: /s/ Patricia Allen Name: Patricia AllenThe foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Electronic acceptance of thisAgreement pursuant to the Company’s instructions to the Optionee (including through an online acceptance process) is acceptable. Dated: October 9, 2017 /s/ Jeffrey Hatfield Jeffrey Hatfield 4 Schedule AVesting Terms • Twenty-five percent of the Stock Option will vest on the first anniversary of the Grant Date and the remaining seventy-five percent of the Stock Optionwill vest in equal quarterly installments over the next twelve quarters. 5 Exhibit 10.25This Waiver (this “Waiver”), dated December 29, 2017 (the “Effective Date”), is by and between Zafgen, Inc., a Delaware corporation (the “Company”),and Jeffrey Hatfield (“Hatfield”), and implements waiver of certain provisions of (i) that certain Offer Letter, dated as of October 3, 2017, by and between theCompany and Hatfield (the “Offer Letter”), and (ii) that certain Non-Qualified Inducement Stock Option Agreement, dated as of October 9, 2017, by andbetween the Company and Hatfield (the “Option Agreement”). Defined terms used but not otherwise defined herein, shall have the meanings ascribed to suchterms in the Offer Letter or the Option Agreement, as applicable.WHEREAS, due to the unanticipated accounting consequences associated with including a cash runway and financing condition in the Offer Letterand Option Agreement; andWHEREAS, the Company’s Board of Directors believes that the stock price performance targets are sufficient to expect that the Company will have orbe able to the obtain necessary financial resources to pursue its business plans.NOW THERREFORE, effective as of the Effective Date, the Board of Directors has determined to amend the Offer Letter and Option Agreement toirrevocably waive the foregoing conditions: 1.Offer Letter: a.The condition in the third bullet point under the Performance Period/Metrics heading of Appendix 1 of the Offer Letter, which reads “In orderto earn any options, the Company must also have a reasonable cash runway to pursue its business plans, as determined by the Board” b.The condition in the second bullet point under the Payout Curve heading of Appendix 1 of the Offer Letter, which reads “and the reasonablelevel of financing has also been achieved” 2.Option Agreement: a.The condition in the third bullet point of Schedule A of the Option Agreement, which reads “In order to earn any Option Shares, the Companymust also have a reasonable cash runway to pursue its business plans, as determined by the Board”. b.The condition in the second bullet point under the Payout Curve heading of Appendix A of the Option Agreement, which reads “and thereasonable level of financing has also been achieved”The parties hereby acknowledge and agree to this Waiver: ZAFGEN, INC.By: /s/ Peter BarrettName: Peter BarrettTitle: Chairman of the Board of Directors /s/ Jeffrey HatfieldJeffrey Hatfield Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-219834) and Form S-8 (Nos. 333-210216,333-196900, 333-204931 and 333-216602) of Zafgen, Inc. of our report dated March 9, 2018 relating to the financial statements, which appears in thisForm 10-K./s/ PricewaterhouseCoopers LLPBoston, MassachusettsMarch 9, 2018 Exhibit 31.1CertificationI, Jeffrey Hatfield, certify that:1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, 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 inExchange Act Rules 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, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal 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, tothe registrant’s auditors 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 reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: March 9, 2018 /s/ Jeffrey HatfieldJeffrey HatfieldChief Executive Officer(Principal Executive Officer) Exhibit 31.2CertificationI, Patricia Allen, certify that:1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, 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 inExchange Act Rules 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, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal 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, tothe registrant’s auditors 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 reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: March 9, 2018 /s/ Patricia AllenPatricia AllenChief Financial Officer(Principal Financial and Accounting Officer) Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Zafgen, Inc. (the “Company”) for the period ended December 31, 2017, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers hereby certify, pursuant to Section 906 of theSarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to his or her knowledge: 1)the Report which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of1934, as amended; and 2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 9, 2018 /s/ Jeffrey Hatfield Jeffrey Hatfield Chief Executive Officer (Principal Executive Officer)Dated: March 9, 2018 /s/ Patricia Allen Patricia Allen Chief Financial Officer (Principal Financial and Accounting Officer)

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