Avalon Pharmaceuticals Reports Fourth Quarter and Full Year 2005 Results

GERMANTOWN, Md., March 7  /PRNewswire-FirstCall/ -- Avalon Pharmaceuticals, Inc. (Nasdaq and ArcaEx(R): AVRX), a biopharmaceutical company focused on the discovery and development of small molecule therapeutics, today announced financial and operational results for the quarter and twelve months ended December 31, 2005.

"2005 was a pivotal year for Avalon and we believe it will be the springboard for our growth in future years," stated Kenneth C. Carter, Ph.D., President and CEO of Avalon.  "We became a clinical stage oncology company by advancing AVN944 into a Phase I trial, made significant progress in drug discovery with two of our internal drug discovery programs moving into lead optimization and established two new discovery partnerships.  In addition, we improved our financial position through the completion of our IPO."

  FOURTH QUARTER AND RECENT OPERATIONAL HIGHLIGHTS

  -- AVN944:  Our U.S. Phase I clinical trial with AVN944 began enrollment
     of patients.  At present, three patients have completed a full cycle of
     dosing, and no adverse effects of study drug have been observed.  The
     Phase I clinical trial is an open-label, repeat dose-escalation study
     for the evaluation of the safety and tolerability of AVN944 in adult
     patients with advanced hematological malignancies including those with
     leukemia, lymphoma or myeloma.  The study is designed to determine the
     optimal dose with which to advance to Phase II efficacy trials, and
     determine the utility of a set of biomarkers discovered through
     AvalonRx(R) in identifying responsive patients.  In the current study,
     as many as 36 patients could receive AVN944 at or near this optimal
     dose.  Currently, this trial is being conducted at four leading cancer
     centers in the United States, including the University of Arkansas for
     Medical Sciences, The University of Texas MD Anderson Cancer Center,
     Stanford University, and The Ohio State University Comprehensive Cancer
     Center -- Arthur G. James Cancer Hospital and Richard J. Solove
     Research Institute.  Information on the trial, including other site
     locations when they initiate treatment, is available at the National
     Institutes of Health clinical trial database at
     http://www.clinicaltrials.gov/ (a service of the U.S. National
     Institutes of Health developed by the National Library of Medicine).

  -- .-catenin and Aurora kinase programs:  In the fourth quarter,
     sufficient progress was completed on characterization and exploratory
     chemistry around hits from Avalon's two discovery programs, so that one
     family was selected from each program for lead optimization.  Avalon's
     goal is to select a compound from each program by the end of 2006 for
     full pre-clinical development.

  -- MedImmune and Novartis programs:  Significant progress continued on the
     MedImmune program during the fourth quarter and we anticipate screening
     to be initiated around the MedImmune target pathway in first quarter of
     2006.  The scientific plan for the Novartis program was developed
     during the fourth quarter of 2005 with the majority of the work related
     to the collaboration expected in 2006.

  -- Private Financing:  In February 2006, Avalon raised $7.25 million
     through a private placement of common stock to Biotech Value Fund and
     other institutional investors.  The proceeds from this financing will
     allow us to expand our internal oncology drug discovery programs and
     take greater advantage of the AvalonRx(R) engine without compromising
     our progress on AVN944 and other more mature programs.

  -- Addition to the Board of Directors:  Effective March 1, 2006, William
     H. Washecka joined the board of directors.  This addition brings the
     Avalon Board to nine members and adds a proven leader with significant
     expertise in finance, accounting and business planning.

  FINANCIAL DETAILS

  -- Total revenues increased to $795,889, for the three months ended
     December 31, 2005, compared to $775,000 for the three months ended
     December 31, 2004.  Substantially all 2005 revenues are related to the
     collaboration agreement with MedImmune, Inc.  A small portion of
     revenue was attributable to collaborations with Novartis and the
     University of Louisville.  Total revenues decreased to $1,543,532, for
     the twelve months ended December 31, 2005, compared to $1,900,000 for
     the twelve months ended December 31, 2004.  All 2005 revenues were
     earned during the last half of 2005.

  -- Operating expenses.  Total costs and expenses from operations increased
     to $4.0 million for the three months ended December 31, 2005, compared
     to $3.7 million for the three months ended December 31, 2004.  This
     increase is primarily related to an accrual for year-end performance
     bonuses and audit fees.  Total costs and expenses from operations
     increased to $20.9 million for the twelve months ended December 31,
     2005, compared to $15.0 million for the twelve months ended December
     31, 2004.  The twelve month period during 2005 included a $5 million
     expense related to our in-licensing agreement with Vertex
     Pharmaceuticals.

  -- Net loss was $3.0 million for the fourth quarter of 2005, compared to a
     net loss of $3.0 million in the fourth quarter of 2004.  For the twelve
     months of 2005, net loss was $19.3 million, compared to a net loss of
     $13.7 million in the twelve months of 2004.

  -- Net loss per share applicable to common stockholders during the fourth
     quarter of 2005 was $(0.37) compared to a loss of $(26.02) in the
     comparable quarter of last year.  During the twelve months of 2005, net
     loss per share applicable to common stockholders was $(9.58) compared
     to a net loss per share of $(117.65) in the twelve months of 2004.  At
     the end of 2005, 8,407,376 common shares were outstanding, compared to
     2,129,388 weighted average number of common shares outstanding at
     December 31, 2005.

  -- As of December 31, 2005, cash, cash equivalents and marketable
     securities totaled $27.7 million.  Of this amount, $6.3 million was
     held in a restricted account to serve as collateral for our long-term
     debt.

  CONFERENCE CALL & WEBCAST INFORMATION


Avalon Pharmaceutical's senior management will host a conference call on Wednesday, March 8, 2006 at 8:00 am EST.  During the call, Dr. Kenneth C. Carter, President and CEO, Gary Lessing, Executive Vice President and Chief Financial Officer and Dr. David Bol, Vice President, Pharmaceutical Development will discuss the quarterly and annual results and other corporate activities.  Live audio of the conference call will be available to investors, members of the news media and the general public by dialing [phone] (in the U.S.) and [phone] (internationally) and providing the participant passcode 38984860.  To access the call by live webcast, please visit the Investor Relations section of our website at http://www.avalonrx.com/.  An archived version of the webcast will also be available through April 30, 2006 on Avalon's website.

About Avalon Pharmaceuticals, Inc.

Avalon Pharmaceuticals is a biopharmaceutical company focused on the discovery and development of small molecule therapeutics for the treatment of cancer. Avalon seeks to discover and develop novel therapeutics through the use of a comprehensive, innovative and proprietary suite of technologies based upon large-scale gene expression analysis which it calls AvalonRx(R). This platform facilitates drug discovery by expanding the range of therapeutic targets for drug intervention, including targets and target pathways frequently considered intractable using conventional HTS approaches, allows more informed decisions about which compounds to advance towards clinical trials, and facilitates drug development through identification of biomarkers of efficacy that can stratify patients or provide early indicators of response.  Avalon Pharmaceuticals was established in 1999 and is headquartered in Germantown, Maryland.

This announcement contains, in addition to historical information, certain forward-looking statements that involve risks and uncertainties, in particular, related to progress in our drug discovery programs and our Medimmune and Novartis collaborations, use of the proceeds of the private placement in future drug discovery programs, the potential to expand Avalon's cancer pipeline, the ability to take greater advantage of the AvalonRx(R) engine and clinical progress in the development of AVN944.  Such statements reflect the current views of Avalon management and are based on certain assumptions.  Actual results could differ materially from those currently anticipated as a result of a number of factors, risks and uncertainties including the risk that the discovery programs and collaborations may not be successful, the cancer pipeline may not be expanded, Avalon may not be able to take greater advantage of the AvalonRx(R) engine and AVN944 will not progress successfully in its clinical trials, and other risks described in our SEC filings.  There can be no assurance that our development efforts will succeed, that AVN944 will receive required regulatory clearance or, even if such regulatory clearance is received, that any subsequent products will ultimately achieve commercial success.

                       AVALON PHARMACEUTICALS, INC.


                         STATEMENTS OF OPERATIONS
                               (Unaudited)
            Dollars in thousands except for per share amounts.

                              Three Months Ended      Twelve months Ended
                                 December 31,             December 31,
                              2005          2004       2005         2004

  Revenues                    $796          $775      $1,544       $1,900

  Costs and expenses:
     Research and
      development            2,601         2,535      15,789       10,680
     General and
      administrative         1,432         1,116       5,066        4,325
  Total costs and
   expenses                  4,033         3,652      20,855       15,005
  Loss from operations      (3,237)       (2,876)    (19,311)     (13,105)

  Total other income
   (expense):                  263          (106)         15         (554)
  Net Loss                  (2,974)       (2,982)    (19,296)     (13,659)

  Accretion of convertible
   preferred
   Stock issuance costs         (0)         (363)     (1,111)      (1,449)

  Net loss attributed
   to common
   stockholders            $(2,974)      $(3,345)   $(20,407)    $(15,108)

  Net loss attributed
   to common
   stockholders per
   common share -
   basic and diluted        $(0.37)      $(26.02)     $(9.58)    $(117.65)

  Weighted average
   number of common
   share - basic and
   diluted*              8,057,996       128,545   2,129,388      128,417

  * Includes the issuance of 2,700,000 shares of common stock and the
    conversion of all outstanding preferred stock and convertible notes into
    5,525,166 shares of common stock upon the close of the IPO in October
    2005.



                       AVALON PHARMACEUTICALS, INC.

                              BALANCE SHEETS
                               (Unaudited)
                          Dollars in thousands.

                                                 December 31,   December 31,
                                                    2005            2004

  ASSETS
  Cash, cash equivalents and
   marketable securities                           $21,435         $8,209

  Total current assets                             $23,365         $8,833

  Restricted cash and securities                     6,313          6,100

  Total assets                                     $41,282        $29,292

  LIABILITIES AND STOCKHOLDERS' DEFICIT
  Total current liabilities                         $5,515         $3,288

  Long-term liabilities                              9,884         11,366

  Total stockholders' equity                        25,883         14,638

  Total liabilities, redeemable
   convertible preferred stock and
   stockholders' deficit                           $41,282        $29,292


  Contacts:
   Avalon Pharmaceuticals, Inc.                Noonan Russo
   Gary Lessing                                Wendy Lau (Media)
   Executive Vice President and CFO            Tel: [phone]
   Tel: [phone]                         Jane Petrino (Investors)
   Fax: [phone]                         Tel: [phone]
   Email: 

DATASOURCE: Avalon Pharmaceuticals, Inc.



CONTACT:  Gary Lessing, Executive Vice President and CFO of Avalon

Pharmaceuticals, Inc., [phone], fax, [phone],

; or Media - Wendy Lau, [phone], or Investors - Jane

Petrino, [phone], both of Noonan Russo



Web site: http://www.avalonrx.com/ 

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