Md. Drug Firm Warns of Funding Troubles

Avalon Cuts Staff, Seeks Capital to Operate Next Year

Avalon Pharmaceuticals told investors yesterday that it will not be able to continue operations past this year if it can't secure more funding.

The Germantown biotech said its second-quarter loss narrowed to $5.6 million, from $5.8 million in the comparable period last year. Revenue was $137,000 for the quarter ended June 30, up from $78,000, thanks to its collaboration with Novartis Institutes for BioMedical Research.

But Avalon's cash, equivalents and marketable securities totaled $16.7 million, an amount that restrains its plans.

"We are acutely aware of our need to raise additional capital in the near term and are vigorously exploring a number of options," C. Eric Winzer, Avalon's chief financial officer, said during a conference call with investors.

To thin its expenses, Avalon will cut a third of its employees, reducing its workforce to about 35 people.

The biotech, which focuses on cancer therapies, will stop work on its most advanced drug candidate and focus on AVN316, a drug that inhibits a cell pathway containing several proteins that play a role in the start and spread of cancer.

Avalon has partnerships with Merck and other firms to investigate compounds to fight several ailments, including cancer. Avalon could receive up to $200 million in milestone, regulatory and other payments as part of its Merck agreement, a partnership created last year to attack a target previously regarded as "undruggable."

The decision to stop work on AVN994, which targets an enzyme that is sometimes overproduced in some cancer cells, especially blood malignancies, surprised analysts.

AVN316 is better understood and appreciated by big pharmaceutical companies, Kenneth C. Carter, Avalon's chief executive, told investors.

"We believe our focus on these other programs will provide better shareholder value in the near term and long term," Carter said.

Last year Avalon raised $30 million in private stock placements to fund its drug pipeline programs.

Shares fell 29 percent yesterday, closing at 73 cents, the company's lowest since going public in 2005.

Slow clinical drug development, which is typical of biotechs, coupled with poor market conditions, have hampered financing, said George B. Zavoico, an analyst with Cantor Fitzgerald in New York.

Like small, struggling biotechs before it, Avalon now faces partnering with another company, debt financing or selling itself. But the big drug companies are losing patent protection on high-revenue products.

"There is a little bit of reluctance to enter into partnership as easily and generously as when they were collecting billions of dollars off blockbuster drugs," Zavoico said. "They see their revenue streams tightening up."