thx to jamie mccaffrey on flickr creative commons

File this under ‘What were they thinking?’

Two days after mounting speculation over a key clinical trial sent Zafgen stock plunging 54 percent, the little drug maker finally released a statement that relieved investors. And by the end of the day, Zafgen shares began recovering – somewhat – from their steep decline.

In its statement, the Cambridge, Mass.-based company disclosed that a patient died in its clinical study of an obesity drug in patients with a rare genetic disorder known as Prader-Willi Syndrome, but that the trial is continuing. Investors interpreted the decision positively. In their view, this suggested the drug did not cause the patient death and, instead, may have occurred among patients in the placebo arm of the trial.

For the record, Zafgen did not actually confirm this important distinction, but investors were encouraged anyway.

Nonetheless, the episode is a textbook case of how not to handle the threat of bad news. And while Zafgen reflects on events, shareholders may reflect on their losses and dial their lawyers.

Here’s what happened: The Zafgen executive team was scheduled to hold meetings this week as part of a so-called road show with investors. But on Monday morning, Zafgen reported the event to the Food and Drug Administration, and then cancelled its investor meetings for yesterday and today.

Such a move almost always triggers speculation. But in this instance, Zafgen was so tight-lipped that investors assumed the worst – something really bad happened in the trial. The drug maker then maintained a stony silence, even as Zafgen stock began plunging on whispers that a patient in the trial had died.

To be fair, any such development is considered to be material information, which means the company is legally obligated to disseminate the news to all shareholders simultaneously. The goal is simply to create a level playing field. But in this case, Zafgen may have been fiddling while its stock burned. The information vacuum that extended until Wednesday afternoon sent investors into a frenzy.

The stock took another hit when RBC Capital Markets analyst Simos Simeonidis issued an investor note in which he placed odds on the various reasons that Zafgen remained silent. He wrote that there was a 35 percent chance that a safety signal had been seen in the trial, especially since the drug is being tested at a higher dose in a larger number of patients. This raises the likelihood of an adverse reaction.

Another point worth noting is that RBC Capital Markets is one of the firms with which Zafgen executives were to have met this week. This suggested to some investors that, perhaps, the theory about the safety signal was correct, although Simeonidis made a point of noting that neither he nor anyone at his firm had been in touch with the drug maker.

For its part, Zafgen is working with the FDA to “expedite a review” of the patient death to determine the implications for the trial. A Zafgen spokeswoman did not respond to a question about why the drug maker took so long to release the information, but we will update you accordingly. Interestingly, Zafgen lists a different investor relations contact today than last week on its press releases.

So what next?

We asked Simeonidis for his thoughts. “Yes, there was a death, but we still don’t know if it occurred on the drug arm or the placebo arm,” he told us. “So we don’t know if it’s related to the drug. We only know that the FDA did not stop the trial. So the drug is being exonerated a little bit and, potentially, the stock could come all the way back. But it could still be something bad later on.”

Meanwhile, Zafgen investors have seen their shares lose considerable value over the past two days, and until or unless the uncertainty hanging over the trial disappears, they are likely to be smarting.

On the other hand, attorneys who specialize in shareholder lawsuits may smell a payday.

[Editor’s note: An earlier version of the post indicated the FDA first called the company to discuss the trial].