Avalon's New Lab Partner: Merck

A Steady Climb
Avalon pharmaceuticals (AVRX ), a little-known biopharma focusing on small-molecule therapeutics for cancer, has teamed up with Big Pharma, including Merck (MRK ), for the use of its AvalonRx drug discovery system. On Mar. 6, Merck signed a pact to use AvalonRx to screen selected Merck compounds to identify inhibitors against an undisclosed target essential for the development of cancer. Avalon could receive up to $200 million in various milestone payments, plus royalties on products. Ren Benjamin of Rodman & Renshaw, who rates Avalon "outperform/speculative," says he is encouraged that the value of AvalonRx technology "is being recognized by the large pharma companies." Avalon, with 2006 sales of just $2.7 million, previously signed pacts with Novartis (NVS ), MedImmune (MEDI ), and Medarex (MEDX ). Avalon's agreement with Merck "should result in identifying first-in-class drug candidates," says Avalon CEO Kenneth Carter. He expects one more Big Pharma to sign up next year. Avalon also makes drugs and its lead product, AVN944, now in Phase 1 trials, aims to inhibit growth of tumor cells, including myeloma, colon, and lung. Patrick Flanigan of WR Hambrecht (it did banking for Avalon) says AVN944 could see peak sales of $500 million. He rates Avalon, trading at 4.67, a buy, with a year's target of 13.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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