West Coast Editor

A deal with Novartis AG in its back pocket, Avalon Pharmaceuticals Inc. went public by offering of 2.75 million shares at $10.50 per share to raise gross proceeds of about $28.87 million, with underwriters given a 30-day option to buy up to 412,500 more shares to cover overallotments, if any.

Avalon's stock (NASDAQ:AVRX) closed Thursday at $9.49, down $1.01. The firm had said in an earlier prospectus that it expected to sell that number of shares at a price range of $10 to $12, and at one point intended to sell 4.5 million shares to raise about $45 million.

The company was in a quiet period under SEC rules and could not comment.

In mid-September, Basel, Switzerland-based Novartis collaborated with Avalon on small-molecule therapeutics targeting an undisclosed pathway chosen by the overseas firm, providing $500,000 up front as a technology access fee, plus research support and potential milestone payments. (See BioWorld Today, Sept. 14, 2005.)

Avalon's drug discovery platform, AvalonRx, accomplishes large-scale gene-expression analysis by way of combining software and hardware with robotics, microfluidics and bioinformatics. The method has identified compounds impacting the beta-catenin regulatory pathway.

It was AvalonRx that drew Novartis' eye, and the same technology bagged a collaboration with MedImmune Inc., of Gaithersburg, Md., in June to discover and develop small-molecule compounds for inflammatory disease.

In its IPO prospectus, Avalon estimated net proceeds from the offering would total about $26.6 million, or about $30.9 million if the underwriters exercised the overallotment option in full, although that was based on the $11 per-share price. Between $8 million and $12 million was earmarked for AVN944 - a Phase I-ready drug against leukemia and lymphoma, licensed earlier this year from Cambridge, Mass.-based Vertex Pharmaceuticals Inc. - and between $5 million and $10 million on the development of other lead programs, including its b-catenin and Aurora kinase programs.

Between $5 million and $10 million from the IPO was to be spent on the discovery of new drug candidates, though management would have "broad discretion to allocate the net proceeds from this offering in any manner" it deems appropriate.

Proceeds were expected to be sufficient for operations for the next 24 months, and to take AVN944 through Phase II trials, as well as put into the early stages of human trials the b-catenin and Aurora kinase compounds. As of June 30, Avalon had about $10.25 million in cash, cash equivalents and marketable securities.

The offering was conducted under the OpenIPO auction process, in which price and the allocation of shares are determined by an auction conducted by the underwriters. That procedure allows for all qualified individual and institutional investors to place bids, with any investors who submit valid bids getting an equal chance for an allocation of shares.

W.R. Hambrecht & Co., of New York, is leading the IPO, and co-managers are Legg Mason Walker Wood Inc., also of New York, and Susquehanna Financial Group, of Philadelphia.