Avalon Pharmaceuticals Reports Fourth Quarter and Full Year 2006 Results

GERMANTOWN, Md., March 21  /PRNewswire-FirstCall/ -- Avalon Pharmaceuticals, Inc. (Nasdaq and NYSE Arca: AVRX), a clinical-stage biopharmaceutical company using its proprietary technology, AvalonRx(R), to discover and develop cancer therapeutics, today announced financial and operational results for the fourth quarter and twelve months ended December 31, 2006.  For the three months ended December 31, 2006, total revenues were $0.7 million and net loss was $4.4 million.  For the fiscal year ended December 31, 2006, total revenues were $2.7 million and net loss was $17.1 million.  As of December 31, 2006, cash, cash equivalents and marketable securities totaled $20.4 million.  This amount does not include the $9.5 million of net proceeds from the equity offering completed in January 2007.

"Avalon had a successful year in 2006 as we continued to execute on our corporate strategy of building a pipeline of first-in-class drugs for Avalon and our partners," stated Kenneth C. Carter, Ph.D., President and CEO of Avalon. "Our Phase I clinical trial of AVN944 is progressing well and preparations are underway for Phase II trials in both hematological cancers and solid tumors. We are off to a strong start to 2007 with the initiation of our recently announced collaboration with Merck and the completion of an equity financing in January of this year."

  Recent Highlights

  Partnership with Merck:


In March 2007, Avalon entered into a drug discovery, development and commercialization agreement with Merck & Co., Inc., to identify and develop inhibitors against a selected target in the area of oncology.  In the partnership, Avalon will use its AvalonRx(R) platform to screen a select set of compounds from Merck's proprietary compound library and identify hits against this target, which is generally regarded as "intractable" based on the difficulty in identifying inhibitors to this target.  Avalon is responsible for the selection of compound families and optimization of those compounds to a preclinical candidate selection stage.  Merck is responsible for the clinical development, regulatory approval and commercialization of any resulting product candidates.

Under the agreement, Avalon will receive milestone payments based on meeting a number of discovery, development and commercial milestones relating to proof of concept, expansion of research term, selection of license compound and filing of INDs for a first cancer indication. Subsequent cancer indications, initiations of different levels of clinical trials for those indications, the filing and approval of NDAs for those indications, and achievement of a specified level of net sales will also result in milestone payments. If all of the milestones under the agreement are achieved, Avalon will receive in excess of $200 million in milestone payments. Avalon will also receive royalties on net sales of products developed in the collaboration.

This collaboration allows Avalon to combine its unique approach of targeting otherwise intractable cancer pathways with Merck's strong drug discovery and development capabilities, and has the potential to lead to the identification of first-in-class drug candidates against the selected target.

  AVN944:

   * Data from the ongoing Phase I study of AVN944 show that AVN944
     demonstrates a good safety profile, has dose-dependent
     pharmacokinetics, induces biomarkers of programmed cell death in cancer
     cells from patients and has clear biologic activity in a subset of the
     patients that have been treated thus far.  For the lymphoma and myeloma
     arm, patients are currently being treated with 150 mg twice daily.  For
     the leukemia arm of the study, patients are currently being treated
     with 200 mg twice daily. To date, 36 patients have completed a total of
     75 28-day cycles of treatment.  Correlation of biomarkers and clinical
     activity suggest that gene expression patterns in patients' malignant
     cells may predict those patients most likely to benefit from AVN944
     treatment.

  Existing Partnerships:

   * Avalon's drug discovery collaboration with Novartis continues to
     progress well. The recent initiation of the screening phase triggered a
     $500,000 payment to Avalon for research support.

   * Avalon's drug discovery collaboration with MedImmune completed the high
     throughput screening phase of the project, and now characterization of
     several compound series is underway with the intention of selecting
     compounds for lead optimization.

   * Work on the ChemDiv collaboration has started with the first screening
     project selected and screen design and signature generation is now
     underway.

  Internal Programs:

   * Avalon's program to identify inhibitors of the Beta-catenin pathway,
     which is abnormally activated in a large number of cancers, including
     over 85% of colon cancers, is currently in late stage lead
     optimization. Lead candidate compounds are currently being tested in
     preclinical tumor efficacy models and in toxicological and
     pharmacological studies. It is our intent to select a preclinical
     candidate for this program in 2007.

   * Avalon's program to identify inhibitors of the Aurora pathway, a key
     regulator of cell division and survival, is in lead optimization. We
     are currently optimizing a series that appears to affect the Aurora
     pathway through a mechanism that is different than compounds that are
     currently in clinical development by other companies. We are testing
     those compounds in preclinical tumor efficacy models and in
     toxicological and pharmacological studies with the intent of selecting
     preclinical candidate in 2007.

   * We are making significant progress on our early stage drug discovery
     program targeting the Survivin and Myc pathways.  These programs target
     two pathways that are critically involved in cancer cell survival and
     have been recognized as conventionally intractable.

  Equity Financing:

   * In January 2007, Avalon closed a $10 million private placement to
     institutional investors. A total of 3 million shares of Avalon's common
     stock were issued in the private placement at a price per share of
     $3.34. The price represented a $0.26 or 8.4% premium to Avalon's
     closing price prior to signing the purchase agreement.  Proceeds will
     be used to fund further development of Avalon's lead oncology drug,
     AVN944, and the continued development of additional pipeline programs
     using the company's proprietary technology, AvalonRx(R).

  Financial Highlights:

   * Total revenues decreased to $0.7 million for the three months ended
     December 31, 2006, compared to $0.8 million for the three months ended
     December 31, 2005. Total revenues increased to $2.7 million, for the
     twelve months ended December 31, 2006, compared to $1.5 million for the
     twelve months ended December 31, 2005. Substantially all 2006 revenues
     are related to our collaboration agreements with MedImmune, Inc. and
     Novartis Institutes for Biomedical Research, Inc.

   * Operating expenses.  Total costs and expenses from operations increased
     to $5.3 million for the three months ended December 31, 2006, compared
     to $4.0 million for the three months ended December 31, 2005.  This
     increase is primarily attributable to higher stock-based compensation
     expense, an increase in clinical trial costs and an increase in lab
     supplies expense. Total costs and expenses from operations were $20.9
     million for the twelve month periods ended December 31, 2006 and 2005.
     During 2006, increases in compensation expense related to the issuance
     of stock options under FAS123(R), clinical trial costs, lab supplies
     expense related, in part, to our collaboration agreements with
     MedImmune and Novartis and other expenses directly related to operating
     as a public company were offset by the inclusion in 2005 of a $5
     million expense related to the in-licensing of AVN944.

   * Net loss was $4.4 million for the fourth quarter of 2006, compared to a
     net loss of $3.0 million in the fourth quarter of 2005. For the twelve
     months of 2006, net loss was $17.1 million, compared to a net loss of
     $19.3 million in the twelve months of 2005.

   * Net loss per share applicable to common stockholders during the fourth
     quarter of 2006 was $0.43 compared to a loss of $0.37 in the comparable
     quarter of last year. For 2006, net loss per share applicable to common
     stockholders was $1.74 compared to a net loss per share of $9.58 for
     2005.  As a result of the initial public offering, which closed on
     October 4, 2005, the per share loss applicable to common stockholders
     for the twelve month period ending December 31, 2005, does not fully
     reflect the conversion of preferred shares into 5,021,014 shares of
     common stock or shares of common stock that were sold to the public.

   * In 2007, Avalon expects a net cash burn rate of approximately $19
     million assuming no incremental cash inflows from new collaborations.
     The increase in net cash burn is attributable to the projected increase
     in clinical activity for AVN944.

  Delisting from NYSE Arca, Inc.


Avalon Pharmaceuticals plans to withdraw the listing of its common stock from NYSE Arca, Inc., formerly the Pacific Exchange. Avalon Pharmaceuticals' common stock will continue to be listed on NASDAQ.

Avalon Pharmaceuticals has decided to withdraw its listing from NYSE Arca, Inc. to reduce cost and to eliminate duplicative administrative requirements inherent with dual listings. The withdrawal is expected to be effective within the next month.

CONFERENCE CALL & WEBCAST INFORMATION

Avalon Pharmaceuticals' senior management will host a conference call on Thursday, March 22, 2007 at 8:00 a.m. Eastern Time, to discuss the quarterly and annual results.  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 pass code, 31676140.  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, 2007 on Avalon's website.

About Avalon Pharmaceuticals

Avalon Pharmaceuticals is a biopharmaceutical company focused on the discovery and development of potential first-in-class cancer therapeutics. Avalon has a lead product in Phase I clinical development (AVN944), preclinical programs to develop inhibitors for the Beta (B)-catenin and Aurora pathways, discovery programs for Survivin and Myc pathway inhibitors, and value generating partnerships with Merck, MedImmune, Medarex, and Novartis. By utilizing AvalonRx(R) our platform technology, based upon the proprietary use of large-scale gene expression, we are uniquely positioned to develop therapeutics focused on pathways that have historically been characterized as "undruggable".  Avalon was established in 1999 and is headquartered in Germantown, Md.

Forward Looking Statements

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 collaborations, 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 and that 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. The information in this Release should be read in conjunction with the Risk Factors set forth in our 2005 Annual Report on Form 10-K and updates contained in subsequent filings we make with the SEC.

                       AVALON PHARMACEUTICALS, INC.
                         STATEMENTS OF OPERATIONS
               (in thousands except for per share amounts)
                               (Unaudited)

                                     Three Months Ended  Twelve Months Ended
                                        December 31,         December 31,
                                      2006       2005      2006       2005

  Revenues                            $653       $796     $2,724     $1,544

  Costs and expenses:
    Research and development         3,360      2,601     13,269     15,789
    General and administrative       1,928      1,432      7,661      5,066
  Total costs and expenses           5,288      4,033     20,930     20,855
  Loss from operations              (4,635)    (3,237)   (18,206)   (19,311)

  Total other income (expense):        244        267      1,104         19
  Net Loss                         $(4,391)   $(2,970)  $(17,102)  $(19,292)

  Accretion of redeemable
   convertible preferred stock
   issuance costs                        -          -          -     (1,111)

  Net loss attributed to common
   stockholders                    $(4,391)   $(2,970)  $(17,102)  $(20,403)

  Net loss attributed to common
   stockholders per common share
   - basic and diluted              $(0.43)    $(0.37)    $(1.74)    $(9.58)

  Weighted average number of
   common share - basic and
   diluted                      10,129,223  8,057,996  9,841,235  2,129,388



                       AVALON PHARMACEUTICALS, INC.
                              BALANCE SHEETS
                              (in thousands)

                                                  December 31,  December 31,
                                                     2006          2005
                                                  (Unaudited)
  ASSETS
  Cash, cash equivalents and marketable securities  $14,910       $21,435
  Restricted cash and securities                      5,520         6,313

  Property and equipment, net                         8,923        10,997
  Other assets, net                                   2,038         2,537
  Total assets                                      $31,391       $41,282

  LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities                                $5,641        $5,514
  Long-term liabilities                               7,876         9,885
  Total stockholders' equity                         17,874        25,883

  Total liabilities and stockholders' equity        $31,391       $41,282


  Contacts:
  Avalon Pharmaceuticals, Inc.         Noonan Russo
  Gary Lessing                         Wendy Lau (Media)
  Executive Vice President and CFO     Tel: [phone]
  Tel:  [phone]
  Fax: [phone]                  The Trout Group LLC
  Email:              Chad Rubin (Investors)
                                       Tel: [phone]


DATASOURCE: Avalon Pharmaceuticals, Inc.



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

Pharmaceuticals, Inc., [phone], Fax: [phone],

; or Wendy Lau, Media, Noonan Russo, [phone]; or Chad

Rubin, Investors, The Trout Group LLC, [phone]; both for Avalon

Pharmaceuticals, Inc.



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

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