UPDATE: Canaccord Genuity Upgrades AEterna Zentaris (AEZS) to Spec. Buy; Analyst Notes Removal of Dilution Overhang From Series B Warrants

(Updated - November 9, 2015 10:49 AM EST)

Canaccord Genuity upgraded Æterna Zentaris (NASDAQ: AEZS) from Hold to Spec. Buy with a price target of $0.10. Analyst Neil Maruoka said the agreement to exercise the majority of the Series B warrants substantially removes the single largest overhang for the stock. He also thinks Zoptrex pivotal data before the end of 2016 will major catalyst for the stock.

Maruoka explained, "Since Æterna Zentaris’ last reporting date, its stock price has continued to decline, losing ~66% of its value at the most recent closing price of US$0.057. We believe the downward pressure has been a result of the dilutive impact of the Series B warrants. The warrants were initially convertible to common shares at a 1 to 1 ratio at a stock price of US$0.81; however, a feature of the warrants allowed the conversion ratio to increase inversely with AEZS’ stock price based on a pre-defined formula."

"Subsequent to quarter end, the company came to terms with ~90% of the Series B warrant holders who have agreed to exercise all of their warrants into common shares at a ratio of ~33 to 1 (this is expected to be completed by November 16, 2015). The agreement will leave ~800K Series B warrants remaining (~2.7% of the originally issued amount), which, at the current stock price, could be converted into an additional ~25 million common shares," continued the analyst.

"Although we view the agreement with the Series B warrant holders as a positive (and necessary) step for Æterna, the impact of the resulting dilution is substantial. The company reported that it currently has 632 million common shares outstanding, which is approximately 3.5x greater than the 182 million common shares reported at the end of Q2 (with ~60 million additional common shares expected to be converted over the next few weeks)," Maruoka added. "Because the conversion ratio of the remaining Series B warrants increases as the stock price declines, for the purposes of updating our valuation, we have made the conservative assumption that the remaining Series B warrants will be converted at the highest ratio so far this year (i.e., when the stock price was at its 52-week low). Lastly, we have assumed that the remaining classifications of other warrants and stock options will not be converted, as the average exercise prices are well in excess of AEZS’ current stock price."

For an analyst ratings summary and ratings history on Æterna Zentaris click here. For more ratings news on Æterna Zentaris click here.

Shares of Æterna Zentaris closed at $0.06 yesterday.

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