Avalon Pharmaceuticals Inc. partnered with Merck & Co. Inc. to discover and develop compounds against an intractable target believed to be important in the development of cancer.

Avalon, of Germantown, Md., could receive more than $200 million in milestone payments from the deal, as well as royalties on any resulting sales. Those payments would be spread from the discovery stage through commercialization. The companies did not break terms out further, nor did they disclose the target.

Gary Lessing, senior vice president and chief financial officer at Avalon, said the target is well known but one that has proved difficult to identify inhibitors against. He said Avalon wanted to begin a discovery program against the target anyway, but is pleased to do it now along with Merck, of Whitehouse Station, N.J.

"Through collaborating with Merck at this point we can increase the probability the program will be successful, and work on terms that have long-term value creation, in part because we're investing in the program as well," Lessing told BioWorld Today. "Both sides of the collaboration were interested in this target."

There is no up-front payment to Avalon, nor is there research funding. Each company will bear its own costs. Lessing said Avalon could earn near-term milestone payments during the research phase of the deal.

Avalon will use its AvalonRx platform to screen Merck compounds and identify hits against the target. It then would optimize the compounds to the preclinical candidate-selection stage.

"The uniqueness of our approach," Lessing said, "is our ability to target intractable or undruggable targets."

AvalonRx comprises a suite of technologies based on large-scale gene expression analysis. This platform facilitates drug discovery by expanding the range of therapeutic targets for drug intervention, including targets and target pathways often considered intractable using conventional high-throughput screening approaches, the company said.

It has applicability in discovery and characterization of hits in vitro and in vivo, optimization of hits to lead compounds, and in drug development.

The Merck deal marks the fifth ongoing collaboration at Avalon, which also has its own oncology-focused pipeline, the lead candidate from which is in Phase I trials.

Just last week, Avalon said it initiated the primary screening phase of its drug discovery collaboration with Novartis AG, of Basel, Switzerland, a deal focused on discovering small-molecule therapeutics against a pathway selected by Novartis. Avalon was entitled to up-front, research and milestone payments from Novartis.

With MedImmune Inc., of Gaithersburg, Md., it is working to discover and develop small-molecule compounds in the area of inflammatory disease. Avalon was entitled to the same type of payments as in the Novartis deal - including up to $16 million in milestone payment for each of three targets - as well as royalties on sales.

Avalon also has deals with Medarex Inc., of Princeton, N.J., and ChemDiv Inc., of San Diego, both cost- and profit-sharing arrangements. The work with Medarex focuses on antibody development, while the ChemDiv collaboration is for identification and development of small-molecule cancer drugs.

Avalon's lead product, AVN944, a small-molecule inhibitor of inosine monosphospate dehydrogenase, demonstrated positive interim results that were released in December, including disease stabilization after a one-month treatment cycle in 12 of the 24 patients with advanced hematologic malignancies. That product was licensed in late 2005 from Vertex Pharmaceuticals Inc., of Cambridge, Mass.

Avalon's preclinical programs include inhibitors of beta-catenin and the Aurora pathway, both in the lead-optimization stage, and discovery programs targeting the survivin pathway and the MYC oncoprotein.

Lessing said Avalon plans to move AVN944 into Phase II trials this year in both hematologic cancers and in solid tumors, with advanced pancreatic cancer targeted as the initial indication in solid tumors. Human trials in the beta-catenin and the Aurora pathway programs are scheduled to begin in 2008, he said.

Avalon reported $23.9 million in cash on Sept. 30, with a loss of $3.7 million that quarter. In January, it completed a $10 million private financing, interesting in that investors purchased the shares at $3.34 each, an 8 percent premium at the time (no warrants were included in the deal). The institutional investors wanted in but wouldn't have been able to purchase that many shares on the open market, Lessing said, so they were willing to pay a premium to acquire the 3 million shares.

That move has paid off, as Avalon's stock (NASDAQ:AVRX) closed Wednesday at $4.78, up 15 cents. It has about 13.1 million shares outstanding.

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