EX-10.3






Exhibit 10.3




THE SECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNLESS (I) SUCH SECURITIES HAVE BEEN
REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, (II) SUCH SECURITIES MAY BE
SOLD PURSUANT TO RULE 144(K), OR (III) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IT THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933 OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS.



AVALON PHARMACEUTICALS, INC.




WARRANT




Warrant No. [ ] Dated: May 25, 2007



AVALON PHARMACEUTICALS, INC., a Delaware corporation (the “Company”), hereby certifies that,
for value received, [Name of Investor] or its registered assigns (the “Holder”), is entitled to
purchase from the Company up to a total of [ ] shares of common stock, $0.01 par value per
share (the “Common Stock”), of the Company (each such share, a “Warrant Share” and all such shares,
the “Warrant Shares”) at an exercise price equal to $6.00 per share (as adjusted from time to time
as provided in Section 9, the “Exercise Price”), at any time and from time to time from and
after the date hereof and through and including the date that is five years from the date of
issuance hereof (the “Expiration Date”), and subject to the following terms and conditions. This
Warrant (this “Warrant”) is one of a series of similar warrants issued pursuant to that certain
Purchase Agreement, dated as of May 24, 2007 by and among the Company and the Investors identified
therein (the “Purchase Agreement”). All such warrants are referred to herein, collectively, as the
“Warrants.”



1. Definitions. In addition to the terms defined elsewhere in this Warrant,
capitalized terms that are not otherwise defined herein have the meanings given to such terms in
the Purchase Agreement.



2. Registration of Warrant. The Company shall register this Warrant, upon records to
be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record
Holder hereof from time to time. The Company may deem and treat the registered Holder of this
Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to
the Holder, and for all other purposes, absent actual notice to the contrary.



3. Registration of Transfers. This Warrant and all rights hereunder are transferable
in whole or in part upon the books of the Company by the Holder hereof; provided, however, that the
transferee shall agree in writing to be bound by the terms and subject to the conditions of this
Warrant and the Purchase Agreement. The Company shall register the transfer of any portion of this
Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment
attached hereto duly completed and signed, to the Transfer Agent or to the Company at its address
specified herein. Upon any such registration or transfer, a new warrant to purchase Common Stock,
in substantially the form of this Warrant (any such new warrant, a “New Warrant”), evidencing the
portion of this Warrant so transferred shall be issued to the transferee and a New Warrant
evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the
transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed
the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant.



4. Exercise and Duration of Warrants.



(a) This Warrant shall be exercisable by the registered Holder at any time and from time to
time on or after the date hereof to and including the Expiration Date. At 6:30 P.M., New York City
time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and
become void and of no value.



(b) A Holder may exercise this Warrant by delivering to the Company (i) this Warrant, (ii) an
exercise notice, in the form attached hereto (the “Exercise Notice”), appropriately completed and
duly signed, and (iii) payment of the Exercise Price for the number of Warrant Shares as to which
this Warrant is being exercised (which may take the form of a “cashless exercise” if so indicated
in the Exercise Notice), and the date such items are delivered to the Company (as determined in
accordance with the notice provisions hereof) is an “Exercise Date.”



5. Delivery of Warrant Shares.



(a) Upon exercise of this Warrant, the Company shall promptly (but in no event later than
three Business Days after the Exercise Date) issue or cause to be issued and cause to be delivered
to or upon the written order of the Holder and in such name or names as the Holder may designate, a
certificate for the Warrant Shares issuable upon such exercise. The Holder, or any Person so
designated by the Holder to receive Warrant Shares, shall be deemed to have become holder of record
of such Warrant Shares as of the Exercise Date.



(b) This Warrant is exercisable, either in its entirety or, from time to time, for a portion
of the number of Warrant Shares. Upon surrender of this Warrant following one or more partial
exercises, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing
the right to purchase the remaining number of Warrant Shares.



(c) Each certificate for Warrant Shares shall bear a restrictive legend to the extent and as
provided in the Purchase Agreement and any certificate issued at any time in exchange or
substitution for any certificate bearing such legend shall also bear such legend, unless, in the
opinion of counsel for the Holder thereof (which opinion shall be reasonably satisfactory to
counsel for the Company), the securities represented thereby are not, at such time, required by law
to bear such legend.



6. Charges, Taxes and Expenses. Issuance and delivery of certificates for shares of
Common Stock upon exercise of this Warrant shall be made without charge to the Holder for any issue
or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect
of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company;
provided, however, that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the registration of any certificates for Warrant Shares or
Warrants in a name other than that of the Holder or an Affiliate thereof. The Holder shall be
responsible for all other tax liability that may arise as a result of holding or transferring this
Warrant or receiving Warrant Shares upon exercise hereof.



7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed,
the Company shall issue or cause to be issued in exchange and substitution for and upon
cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable indemnity, if requested. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and procedures and pay such
other reasonable third-party costs as the Company may prescribe.



8. Reservation of Warrant Shares. The Company covenants that it will at all times
reserve and keep available out of the aggregate of its authorized but unissued and otherwise
unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon
exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable
and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other
contingent purchase rights of persons other than the Holder (taking into account the adjustments
and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable
and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance
with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable.
The Company will take all such action as may be necessary to assure that such shares of Common
Stock may be issued as provided herein without violation of any applicable law or regulation, or of
any requirements of any securities exchange or automated quotation system upon which the Common
Stock may be listed.



9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon
exercise of this Warrant are subject to adjustment from time to time as set forth in this
Section 9.



(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is
outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any
class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding
shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of
Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of Common Stock
outstanding immediately before such event and of which the denominator shall be the number of
shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to
clause (i) of this paragraph shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution, and any adjustment
pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the
effective date of such subdivision or combination.



(b) Other Distributions. In the event the Company at any time or from time to time
sets a record date for the determination of holders of Common Stock entitled to receive any
distribution payable in securities or assets of the Company other than shares of Common Stock or
cash dividends paid or payable solely out of retained earnings, then and in such event provision
shall be made so that the Holder shall receive upon conversion of this Warrant, in addition to the
number of shares of Common Stock receivable thereupon, the amount of securities or assets of the
Company which it would have received had this Warrant been converted into Common Stock on the date
of such event and had it thereafter, during the period from the date of such event to and including
the date of conversion, retained such securities or assets receivable by it as aforesaid during
such period, subject to all other adjustment called for during such period as provided in this
Warrant.



(c) Reclassification, Reorganization or Merger. If, at any time while this Warrant is
outstanding, (i) the Company effects any merger or consolidation of the Company with or into
another Person, (ii) any tender offer or exchange offer (whether by the Company or another Person)
is completed pursuant to which holders of Common Stock are permitted to tender or exchange their
shares for other securities, cash or property, or (iii) the Company effects any reclassification of
the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property (other than as a result of a
subdivision or combination of shares of Common Stock covered by Section 9(a) above) (in any
such case, a “Fundamental Transaction”), then the Holder shall have the right thereafter to
receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as
it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it
had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant
Shares then issuable upon exercise in full of this Warrant (the “Alternate Consideration”). The
aggregate Exercise Price for this Warrant will not be affected by any such Fundamental Transaction,
but the Company shall apportion such aggregate Exercise Price among the Alternate Consideration in
a reasonable manner reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the securities, cash or
property to be received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any exercise of this Warrant following
such Fundamental Transaction.



(d) Subsequent Equity Sales. If the Company at any time while this Warrant is
outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or
otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or
other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire
shares of Common Stock, at an effective price per share less than the then Exercise Price (such
lower price, the “Base Share Price” and such issuances collectively, a “Dilutive
Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at
any time, whether by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per
share which are issued in connection with such issuance, be entitled to receive shares of Common
Stock at an effective price per share which is less than the Exercise Price, such issuance shall be
deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance),
then the Exercise Price shall be reduced and only reduced by multiplying the Exercise Price by a
fraction, the numerator of which is the number of shares of Common Stock issued and outstanding
immediately prior to the Dilutive Issuance plus the number of shares of Common Stock which the
offering price for such Dilutive Issuance would purchase at the then Exercise Price, and the
denominator of which shall be the sum of the number of shares of Common Stock issued and
outstanding immediately prior to the Dilutive Issuance plus the number of shares of Common Stock so
issued or issuable in connection with the Dilutive Issuance. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing,
no adjustments shall be made under this Section 3(d) in respect of an Exempt Issuance and
no adjustments shall be made under this Section 3(d) to the extent such adjustment would
result in the Base Share Price being less than Closing Price on May 24, 2007 (subject to
appropriate adjustment for any stock splits, stock dividends, combinations, subdivisions,
recapitalizations and the like with respect to the Common Stock).



(e) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise
Price pursuant to paragraphs (a) or (b) of this Section, the number of Warrant Shares that may be
purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that
after such adjustment the aggregate Exercise Price payable hereunder for the increased or decreased
number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately
prior to such adjustment.



(f) Calculations. All calculations under this Section 9 shall be made to the
nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or for the account of
the Company, and the disposition of any such shares shall be considered an issue or sale of Common
Stock.



(g) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this
Section 9, the Company at its expense will promptly compute such adjustment in accordance
with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a
statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other
securities issuable upon exercise of this Warrant (as applicable), describing the transactions
giving rise to such adjustments and showing in detail the facts upon which such adjustment is
based. Upon written request, the Company will promptly deliver a copy of each such certificate to
the Holder and to the Company’s Transfer Agent.



(h) Notice of Corporate Events. If the Company (i) declares a dividend or any other
distribution of cash, securities or other property in respect of its Common Stock, including
without limitation any granting of rights or warrants to subscribe for or purchase any capital
stock of the Company or any Subsidiary, (ii) authorizes or approves, or enters into any agreement
contemplating or solicits stockholder approval for a Fundamental Transaction or (iii) authorizes
the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the
Company shall deliver to the Holder a notice describing the material terms and conditions of such
transaction, at least 10 calendar days prior to the applicable record or effective date on which a
Person would need to hold Common Stock in order to participate in or vote with respect to such
transaction, and the Company will take all steps reasonably necessary in order to insure that the
Holder is given the practical opportunity to exercise this Warrant prior to such time so as to
participate in or vote with respect to such transaction; provided, however, that the failure to
deliver such notice or any defect therein shall not affect the validity of the corporate action
required to be described in such notice.



10. Payment of Exercise Price. The Holder, at its election, may either pay the
Exercise Price in immediately available funds, or satisfy its obligation to pay the Exercise Price
through a “cashless exercise,” in which event the Company shall issue to the Holder the number of
Warrant Shares determined as follows:



	 	 	 
	
 
	 	X = Y [(A-B)/A]
	 
	 	 
	 
	 	 
	 
	 	 
	where:

	 	

	 
	 	 
	
 
	 	X = the number of Warrant Shares to

be issued to the Holder.
	 
	 	 
	
 
	 	Y = the number of Warrant Shares

with respect to which this Warrant

is being exercised.
	 
	 	 
	
 
	 	A = the Current Market Price (as of

the date of such calculation) of one

share of Common Stock .
	 
	 	 
	
 
	 	B = the Exercise Price (as adjusted

to the date of such calculation).






For purposes of this Warrant, the “Current Market Price” of one share of the Company’s Common
Stock as of a particular date shall be determined as follows: (a) if traded on a national
securities exchange or through the Nasdaq, the Current Market Price shall be deemed to be the
arithmetic average of the VWAPs for the five consecutive trading days immediately preceding the
applicable date; (b) if traded over-the-counter but not on the Nasdaq, the Current Market Price
shall be deemed to be the average of the closing bid and asked prices as of five business days
immediately prior to the date of exercise indicated in the Notice of Exercise; and (c) if there is
no active public market, the Current Market Price shall be the fair market value of the Common
Stock as of the date of exercise, as determined by an independent appraiser selected in good faith
by the Company.



“VWAP” means, for any date, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the principal market on which the Common Stock is then
listed or quoted for trading as reported by Bloomberg L.P.



For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and
acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to
have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to
have commenced, on the date this Warrant was originally issued pursuant to the Purchase Agreement.



11. Fractional Shares. The Company shall not be required to issue or cause to be
issued fractional Warrant Shares on the exercise of this Warrant. If any fraction of a Warrant
Share would, except for the provisions of this Section, be issuable upon exercise of this Warrant,
the number of Warrant Shares to be issued will be rounded up to the nearest whole share or right to
purchase the nearest whole share, as the case may be.



12. Notices. Any and all notices or other communications or deliveries hereunder
(including without limitation any Exercise Notice) shall be in writing and shall be deemed given
and effective on the earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the next Business Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number specified in this
Section on a day that is not a Business Day or later than 6:30 p.m. (New York City time) on any
Business Day, (iii) the Business Day following the date of mailing, if sent by a nationally
recognized overnight courier service specifying next Business Day delivery, or (iv) upon actual
receipt by the party to whom such notice is required to be given, if by hand delivery. The address
and facsimile number of a party for such notices or communications shall be as set forth in the
Purchase Agreement, unless changed by such party by two Business Days’ prior notice to the other
party in accordance with this Section 12.



13. Miscellaneous.



(a) Subject to the restrictions on transfer set forth on the first page hereof and in
Section 3, this Warrant may be assigned by the Holder. This Warrant may not be assigned by
the Company except to a successor in the event of a Fundamental Transaction or with the prior
written consent of the Holder. This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns. Subject to the preceding sentence,
nothing in this Warrant shall be construed to give to any Person other than the Company and the
Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant,
together with the other Transaction Documents, constitutes the entire agreement of the parties with
respect to the subject matter hereof. This Warrant may be amended only in writing signed by the
Company and the Holder and their successors and assigns.



(b) This Warrant shall be governed by, and construed in accordance with, the internal laws
of the State of New York without regard to the choice of law principles thereof. Each of the
parties hereto irrevocably submits to the exclusive jurisdiction of the courts of the State of New
York located in New York County and the United States District Court for the Southern District of
New York for the purpose of any suit, action, proceeding or judgment relating to or arising out of
this Warrant and the transactions contemplated hereby. Service of process in connection with any
such suit, action or proceeding may be served on each party hereto anywhere in the world by the
same methods as are specified for the giving of notices under this Warrant. Each of the parties
hereto irrevocably consents to the jurisdiction of any such court in any such suit, action or
proceeding and to the laying of venue in such court. Each party hereto irrevocably waives any
objection to the laying of venue of any such suit, action or proceeding brought in such courts and
irrevocably waives any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A
TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS WARRANT AND REPRESENTS THAT COUNSEL HAS BEEN
CONSULTED SPECIFICALLY AS TO THIS WAIVER.



(c) The headings herein are for convenience only, do not constitute a part of this Warrant and
shall not be deemed to limit or affect any of the provisions hereof.



(d) In case any one or more of the provisions of this Warrant shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining terms and provisions
of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt
in good faith to agree upon a valid and enforceable provision which shall be a commercially
reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision
in this Warrant.



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,

SIGNATURE PAGE FOLLOWS]




IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized
officer as of the date first indicated above.



	 
	 

	AVALON PHARMACEUTICALS, INC.

	 

	 

	 

	By:

	Name: Kenneth C. Carter, Ph.D.

	Title: President and Chief Executive Officer







1




FORM OF EXERCISE NOTICE




(To be executed by the Holder to exercise the right to purchase shares of Common Stock under the
foregoing Warrant)



To: AVALON PHARMACEUTICALS, INC.



The undersigned is the Holder of Warrant No.      (the “Warrant”) issued by AVALON
PHARMACEUTICALS, INC., a Delaware corporation (the “Company”). Capitalized terms used herein and
not otherwise defined have the respective meanings set forth in the Warrant.




	 	1.	 	The Warrant is currently exercisable to purchase a total of      Warrant
Shares.






	 	2.	 	The undersigned Holder hereby exercises its right to purchase      Warrant
Shares pursuant to the Warrant.






	 	3.	 	The Holder intends that payment of the Exercise Price shall be made as (check one):





	 	 	 
	     

     

	 	“Cash Exercise” under Section 10

“Cashless Exercise” under Section 10







	 	4.	 	If the Holder has elected a Cash Exercise, the Holder shall pay the sum of
$     to the Company in accordance with the terms of the Warrant.






	 	5.	 	Pursuant to this exercise, the Company shall deliver to the Holder      
Warrant Shares in accordance with the terms of the Warrant.






	 	6.	 	Following this exercise, the Warrant shall be exercisable to purchase a total of
     Warrant Shares.





[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,

SIGNATURE PAGE FOLLOWS]






2







IN WITNESS WHEREOF, the undersigned has caused this Exercise Notice to be duly executed as
of the date indicated below.



	 	 	 
	Dated: ,

	 	Name of Holder:
	 
	 	 
	
 
	 	(Print)
	 
	 	 
	
 
	 	By:
	
 
	 	Name:
	
 
	 	Title:
	 
	 	 
	
 
	 	(Signature must conform in all respects to name of holder

as specified on the face of the Warrant)






FORM OF ASSIGNMENT




[To be completed and signed only upon transfer of Warrant]



FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
     the right represented by the within Warrant to purchase
     shares of Common Stock of AVALON PHARMACEUTICALS, INC. to which the within Warrant
relates and appoints      attorney to transfer said right on the books of AVALON
PHARMACEUTICALS, INC. with full power of substitution in the premises.



	 	 	 
	Dated: ,

	 	

	 
	 	 
	
 
	 	(Signature must conform in all respects to name

of holder as specified on the face of the

Warrant)
	 
	 	 
	
 
	 	Address of Transferee
	 
	 	 
	 
	 	 
	 
	 	 
	In the presence of:

	 	

	 
	 	 







3