Avalon Pharmaceuticals Reports Third Quarter 2006 Results

GERMANTOWN, Md., Nov. 7  /PRNewswire-FirstCall/ -- Avalon Pharmaceuticals, Inc. (Nasdaq and NYSE Arca: AVRX), a biopharmaceutical company focused on the discovery and development of small molecule therapeutics, today announced financial and operational results for the third quarter and nine months ended September 30, 2006.

"In the third quarter of 2006, our internal discovery and development programs, focused on novel drugs to treat cancer, continued to make great progress and we continue to be encouraged by the progress of our phase I clinical trial for AVN944, showing tolerance by patients to increasing dose levels," stated Kenneth C. Carter, Ph.D., President and CEO of Avalon.  "Our discovery programs and partnerships with Novartis, MedImmune and ChemDiv also continue to advance.  We are also very pleased to have made several important additions to our management and leadership support."

THIRD QUARTER AND RECENT OPERATIONAL HIGHLIGHTS

AVN944: The AVN944 phase I repeat-dose dose escalation trial in patients with advanced hematological malignancies, divided into two cohorts, continues to progress. Cohort 1 has patients with acute myelogenous leukemia and cohort 2 has enrolled patients with multiple myeloma and chronic lymphocytic leukemia.  The enrollment and progress of the trial is on schedule with seven dose groups completed and two additional groups enrolling. Avalon's AvalonRx(R) technology is also in use, showing that even the lowest doses of AVN944 given to patients is having a biologic effect on cancer cells.

Internal Programs and Partnerships: Both the Beta-catenin and Aurora pathway inhibitor programs are now in lead optimization.  The Company continues to synthesize active analogs in both programs, and is improving the biological properties of each series and characterization of the structure- activity-relationship using AvalonRx(R).  Additional testing has also been initiated in both series to define the toxicological and pharmacological properties of the selected compounds.

Avalon's drug discovery collaboration with MedImmune has completed the high-throughput screening phase and several compound families have been selected for further characterization. These compound families have progressed into the hit-to-lead process, and are being qualified in assays at both Avalon and MedImmune.

Additionally, the drug discovery collaboration with Novartis has reached the final stages of signature selection and work on the high-throughput screening phase is expected to begin by the end of the year.

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

During this quarter, Avalon also made significant progress on its early stage discovery initiatives and has begun a high-throughput screen targeting the Survivin pathway.

  Leadership Highlights:

  *  New Chief Business Officer: The Company appointed David D. Muth to the
     newly created position of Executive Vice President, Chief Business
     Officer, effective September 21, 2006. Mr. Muth will contribute to the
     development of the corporate strategy, be responsible for developing
     new commercial opportunities and direct all business development
     activities.  Mr. Muth has over 25 years of business experience in the
     biotechnology and pharmaceutical industries.

  *  New Board of Directors Member: The Company recently announced the
     appointment of David Kabakoff, Ph.D., to its board of directors. Dr.
     Kabakoff is the current President and CEO of Strategy Advisors which he
     established in 2001 to provide business and strategic advisory services
     to life sciences companies.  Prior to its acquisition by Cephalon, Inc.
     in June 2005, Dr. Kabakoff served as Chairman and Chief Executive
     Officer of Salmedix, Inc., a company he co-founded in 2001 to develop
     novel oncology drugs.

  *  New Scientific Advisory Board Member: The Company appointed Todd R.
     Golub, M.D., to the position of Chairman of its Scientific Advisory
     Board. Dr. Golub is a founding member of the Broad Institute and serves
     as director of its Cancer Program.

  FINANCIAL DETAILS

  *  Total revenues increased to $1.1 million, for the three months ended
     September 30, 2006, compared to $748,000 for the three months ended
     September 30, 2005.  Total revenues increased to $2.1 million, for the
     nine months ended September 30, 2006, compared to $748,000 for the nine
     months ended September 30, 2005.  Substantially all 2006 revenues are
     related to our collaboration agreements with MedImmune, Inc. and
     Novartis Institutes for Biomedical Research, Inc.  A small portion of
     revenue was attributable to our collaboration agreement with the
     University of Louisville.

  *  Operating expenses.  Total costs and expenses from operations increased
     to $5.1 million for the three months ended September 30, 2006, compared
     to $4.4 million for the three months ended September 30, 2005.  This
     increase is primarily related to compensation expense related to the
     issuance of stock options under FAS123(R), an increase in clinical
     trial costs related to our AVN944 drug candidate, an increase in 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.  Total costs and expenses from operations
     decreased to $15.6 million for the nine months ended September 30,
     2006, compared to $16.8 million for the nine months ended September 30,
     2005.  This decrease was primarily attributable to the inclusion in the
     prior year period of an upfront payment of $5.0 million to Vertex
     Pharmaceuticals for the in-license of AVN944.  This decrease was offset
     by increases in compensation expense related to the issuance of stock
     options under FAS123(R), an increase in clinical trial costs related to
     our AVN944 drug candidate, an increase in lab supplies expense related,
     in part, to our collaboration agreement with MedImmune and Novartis and
     other expenses directly related to operating as a public company.

  *  Net loss was $3.7 million for the third quarter of 2006, compared to
     a net loss of $3.6 million in the third quarter of 2005. For the first
     nine months of 2006, net loss was $12.7 million, compared to a net loss
     of $16.3 million in the first nine months of 2005.

  *  Net loss per share applicable to common stockholders during the third
     quarter of 2006 was $0.37 compared to a loss of $25.58 in the
     comparable quarter of last year. During the first nine months of 2006,
     net loss per share applicable to common stockholders was $1.30 compared
     to a net loss per share of $125.89 in the first nine months of 2005.
     As a result of the initial public offering, which closed on October 4,
     2005 - subsequent to the end of the third quarter of 2005, the per
     share loss applicable to common stockholders for the three and nine
     month periods ending September 30, 2005, does not 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.



As of September 30, 2006, cash, cash equivalents and marketable securities totaled $23.9 million.  Of this amount, $5.5 million was held in a restricted account to serve as collateral for our long-term debt.

CONFERENCE CALL & WEBCAST INFORMATION

Avalon Pharmaceuticals' senior management will host a conference call on Wednesday, November 8, 2006, at 8:00 a.m. EST, to discuss the quarterly 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, 80900111.  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 December 30, 2006 on Avalon's website.

About Avalon Pharmaceuticals

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 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   Nine Months Ended
                                     September 30,        September 30,
                                    2006       2005     2006        2005

  Revenues                         $1,115      $748     $2,071      $748

  Costs and expenses:
     Research and
     development                    3,422     3,174      9,909    13,188
     General and
      administrative                1,685     1,185      5,734      3,634
  Total costs and expenses          5,107     4,359     15,643     16,822
  Loss from operations             (3,992)   (3,611)   (13,572)   (16,074)

  Total other income (expense):       269       (32)       861       (249)
  Net Loss                        $(3,723)  $(3,643)  $(12,711)  $(16,323)
  Accretion of redeemable
   convertible preferred
   stock issuance costs                 -      (370)        -      (1,111)

  Net loss attributed to
   common stockholders            $(3,723)  $(4,013)  $(12,711)  $(17,434)

  Net loss attributed to
   common stockholders
   per common share -
   basic and diluted               $(0.37)  $(25.58)    $(1.30)  $(125.89)

  Weighted average number
   of common share - basic
   and diluted                 10,106,947   156,872  9,744,184    138,490



                       AVALON PHARMACEUTICALS, INC.
                              BALANCE SHEETS
                              (in thousands)

                                          September 30,         December 31,
                                             2006                   2005
                                          (Unaudited)
  ASSETS
  Cash, cash equivalents and
   marketable securities                    $18,428                $21,436

  Restricted cash and securities              5,520                  6,313

  Property and equipment, net                 9,260                 10,997

  Other assets, net                           2,284                  2,536

  Total assets                              $35,492                $41,282

  LIABILITIES AND STOCKHOLDERS' EQUITY

  Current liabilities                        $5,717                 $5,514

  Long-term liabilities                       7,857                  9,885

  Total stockholders' equity                 21,918                 25,883

  Total liabilities and
   stockholders' equity                     $35,492                $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] ext. 47


DATASOURCE: Avalon Pharmaceuticals, Inc.



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

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

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

Rubin, Investors, The Trout Group LLC, [phone] ext. 47



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

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