Maryland-based Avalon Pharmaceuticals' deal with Merck sparks frenzy

Daily Record, The (Baltimore), Mar 8, 2007 by Karen Buckelew

Avalon Pharmaceuticals Inc.'s new cancer drug screening deal with Merck & Co. Inc. has created a frenzy of trading on the public market.

More than 1.6 million Avalon shares changed hands Wednesday, compared with the three-month average daily volume of 23,000 shares.

But the worth of the deal is more than the potential $200 million Avalon could earn, said company President and Chief Executive Kenneth C. Carter.

"The validation is wonderful," Carter said - especially as Avalon is looking to form new partnerships in the near future, likely for its own drug-discovery pipeline.

In the six-year deal, Avalon will use its proprietary drug- screening technology, AvalonRx Drug Discovery Engine, to test Merck's library of compounds for their effectiveness against an unnamed target within a cell that has been identified as a cancer trigger.

The target has been deemed "intractable" by the industry, meaning it is difficult to find compounds that would affect it using ordinary screening processes.

The after-market announcement Tuesday sent Avalon's shares, AVRX on the Nasdaq, up as much as 26.34 percent Wednesday. The shares closed at $4.78, up 15 cents, or 3.2 percent.

The $200 million value is a potential worth based on Avalon meeting certain milestones. The company will begin to see payments within the next year, said Carter, who declined to disclose further financial details.

Avalon could see as much as $10 million within the next year to two years, according to estimates issued Wednesday by WR Hambrecht Co. analyst Patrick E. Flanigan III in Boston.

"We believe Avalon is an undiscovered gem with unlimited potential," Flanigan wrote in a report issued Wednesday. He rated the stock "buy" and has set a $13 price target for the year.

Avalon's sole source of revenue is a series deals such as this, including agreements with Novartis and MedImmune Inc. of Gaithersburg.

According to the company's latest federal regulatory filing, Avalon reported $1.3 million in sales during the three months ended Sept. 30, a 177 percent increase from the same period in 2005.

If any of Merck's compounds are found to be effective against the unnamed marker, Merck may either opt to continue development itself or allow Avalon to further develop the therapeutic.

That condition is rarely found in such agreements, said Carter, and could be of great benefit to Avalon.

Avalon has used AvalonRx to develop its own drug-discovery pipeline, including cancer treatments, and has several candidates in clinical stages. Carter said the Merck deal is helpful in drawing attention to the company's drug-discovery pipeline.

Avalon is considering licensing perhaps half of its six established drug candidates within the year. The move could generate more revenue to support development of the company's other products, Carter said.

"We are hopeful some of those later stage, first-in-class drug candidates could bring not only milestones but also significant up- front payments to help us fund some of our internal pipeline," Carter said.

The success of AvalonRx to complement a healthy drug-development pipeline was the goal of the firm's founders in 2000, said Carter.

"I'm very proud that original business plan the founders put together is exactly what we're executing today," Carter said.