Document:

exv10w42

 

Exhibit 10.42

			
	EXECUTION COPY
	 	CONFIDENTIAL

COLLABORATION AND LICENSE AGREEMENT

     THIS COLLABORATION AND LICENSE AGREEMENT (this “Agreement”) dated as of June 17, 2005, (the
“Effective Date”) is by and between Avalon Pharmaceuticals, Inc. (“Avalon”), a Delaware
Corporation, having a place of business at 20358 Seneca Meadows Parkway, Germantown, MD 20876 and
MedImmune, Inc. (“MedImmune”), a Delaware corporation, having a place of business at One MedImmune
Way, Gaithersburg, MD 20878. Avalon and MedImmune may each be referred to herein individually as a
“Party” and collectively as the “Parties.”

     WHEREAS, Avalon has developed and controls certain chemical genomics technology related to
facilitating drug discovery and development;

     WHEREAS, MedImmune wishes to obtain the benefit of Avalon’s chemical genomics technology for
use in identifying compounds useful for treating inflammatory and autoimmune disorders; and

     WHEREAS, Avalon and MedImmune have agreed to collaborate, on the terms and conditions set
forth herein, on the discovery and development of compounds for treating inflammatory and
autoimmune disorders of humans.

     NOW THEREFORE, in consideration of the mutual promises and covenants set forth below and other
good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties hereby agree as follows:

	1.	 	DEFINITIONS.
	 
	1.1	 	“Affiliate(s)” means any Person that, directly or indirectly, owns, is owned by, or is under
common ownership with a Party to this Agreement or any Person actually controlled by,
controlling, or under common control with a Party to this Agreement. For the purposes of this
definition, “ownership” or “control” means a Person owns or controls at least (a) fifty
percent (50%) of the voting stock of a corporation, or (b) in the absence of the ownership of
at least fifty percent (50%) of the voting stock of a corporation or in the case of
non-corporate entity, has the power to direct or cause the direction of the management and
polices of such corporation or non-corporate entity, as applicable.
	 
	1.2	 	“Analog” of a given Compound means a chemical compound derived by addition to or manipulation
of the structure of such Compound.
	 
	1.3	 	“Avalon Chemical Library” means the set of Compounds that Avalon owns or controls that are
employed during Stage II of the Research Program and from which a Compound Hit is selected.
	 
	1.4	 	“Avalon Compound Know-How” means any Avalon Know-How covering the Lead Compounds, Optimized
Lead Compounds and Compound Families.

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

 

 

	1.5	 	“Avalon Compound Patent Rights” means any Avalon Patent Rights covering the Lead Compounds,
Optimized Lead Compounds and Compound Families.
	 
	1.6	 	“Avalon Core Technology” means all proprietary apparatuses, materials, methods, processes,
information, data, databases and analyses Controlled by either Avalon or its Affiliates as of
the Effective Date or coming into the Control of Avalon or its Affiliates during the Term
relating to the use of HITS, METS, RACETraCK and/or TSAR and all related screening methods and
processes, including methods and processes useful or helpful to induce a desired profile
across a gene signature set and its correlation with the inhibition or activation of a target.
	 
	1.7	 	“Avalon Indemnified Party” shall have the meaning set forth in Section 11.1.
	 
	1.8	 	“Avalon Target Know-How” means * and any analyses thereof obtained from the activities
conducted by Avalon under Sections A.2 or A.3 of the Research Program; * the* designed by
Avalon and any Know-How developed by Avalon relating to the use of * for inhibiting expression
of a Target in a Reference Cell or MedImmune Cell under * of the Research Program (other than
Avalon Core Technology); * (as defined in * and any Avalon Know-How developed by Avalon under
the Research Program related thereto; and (d) any protein, peptide, biological agent
(including but not limited to an antibody), Selected Compound Hit, Lead Compound, Analog of a
Lead Compound, Optimized Lead Compound or Clinical Candidate that would have the substantially
equivalent * as determined by Avalon Core Technology obtained from the activities conducted by
Avalon under the Research Program.
	 
	1.9	 	“Avalon Know-How” means all apparatuses, materials (including the Avalon Chemical Library),
processes, information, data, databases and analyses controlled by either Avalon or its
Affiliates as of the Effective Date or coming into the control of Avalon or its Affiliates
during the Term relating to the Research Program, including Joint Inventions that are also
Avalon Core Technology and including information, analyses and material (including RNA)
derived from HITS, METS, RACETraCK and TSAR or relating to any Compound, Compound Families
and/or Compound Hits, Avalon Target Know-How, or information relating to cell signaling
pathways involving a Target, that is at any time identified or developed under the Research
Program, or to any Analogs of any such Compounds.
	 
	1.10	 	“Avalon Patent Rights” means Patent Rights that Avalon owns or Controls as of the Effective
Date or that come into the Control of Avalon during the Term relating to the Research Program,
including Avalon’s interest in the Joint Inventions that are also Avalon Core Technology and
including information, analyses and material (including RNA) derived from HITS, METS,
RACETraCK and TSAR or relating to any Compound, Compound Families and/or Compound Hits, Avalon
Target Know-How, or information relating to cell signaling pathways involving a Target, that
is at any time identified or developed under the Research Program, or to any Analogs of any
such

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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	 	 	Compounds including those patents and/or patent applications set forth on Exhibit C
attached hereto and incorporated by reference.

	1.11	 	“Avalon Technology” means the Avalon Patent Rights, Avalon Know-How, the Avalon Target
Know-How and any and all intellectual property rights in data, information, materials and
inventions created and/or invented solely by employees of Avalon or persons obligated to
assign such data, information, materials and inventions to Avalon.
	 
	1.12	 	“Breaching Party” has the meaning defined in Section 10.3.1(a).
	 
	1.13	 	“Calendar Quarter” means the respective periods of three consecutive calendar months ending
on March 31, June 30, September 30 or December 31, for so long as this Agreement is in effect.
	 
	1.14	 	“Change of Control” means any of the following: (a) the sale or disposition of all or
substantially all of the assets of a Party to a Third Party, (b) the acquisition by a Third
Party, other than an employee benefit plan (or related trust) sponsored or maintained by a
Party or any of its Affiliates, of more than 50% of such Party’s outstanding shares of voting
capital stock, or (c) the merger or consolidation of a Party with or into another corporation,
other than a merger or consolidation of a Party in which holders of shares of such Party’s
voting capital stock immediately prior to the merger or consolidation will have at least 50%
of the ownership of voting capital stock of the surviving corporation immediately after the
merger or consolidation.
	 
	1.15	 	“Clinical Candidate” means an (a) Optimized Lead Compound or any Analog thereof or (b) any
other Compound that MedImmune selects or otherwise designates in writing to Avalon for
participation in a Development and Commercialization Program as a candidate for clinical study
in humans.
	 
	1.16	 	“Collaboration Technology” has the meaning defined in Section 7.2.1(c).
	 
	1.17	 	“Commercially Reasonable Efforts” means with respect to efforts and resources that would be
at least commensurate with the efforts used by a Party, as applicable, to identify, discover,
develop, market or sell products having similar market and profit potential as the Product,
provided that such efforts shall be at least commensurate with the efforts reasonably used in
the biotechnology industry for products having similar market and profit potential exercising
prudent scientific and business judgment.
	 
	1.18	 	“Compound” means (a) a chemical compound or substance, identified using Avalon Core
Technology, together less than two kilodaltons (kD), with all complexes, mixtures and other
combinations, prodrugs, metabolites, enantiomers, polymorphs, salt forms, racemates, and
isomers thereof (b) that is not a nucleic acid, polypeptide, protein, vaccine or antibody and
fragments of an antibody, any of which is either of natural origin, expressed by recombinant
methodology or chemically synthesized or which may be a chemical structure derived therefrom,
an analog, derivative, congener or the like.

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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	1.19	 	“Compound Family” means a group of Compounds that shares a similar gene expression profile
generated by METS analysis and a common chemical scaffold.
	 
	1.20	 	“Compound Hit” means a Compound identified from HITS screening that induces a desired profile
across a gene Signature Set that correlates with the inhibition or activation of a Target.
Upon achievement of the milestone for Selection of a Compound Family and MedImmune’s payment
of the first milestone payment set forth in Section 5.2.2, MedImmune shall have the right to
select, through written notice to Avalon, * provided, however, that MedImmune shall have the
right, by delivering written notice to Avalon during the term of the Research Program, to
delete any previously selected Compound Families and replace them with additional Compound
Families so long as the total number of Compound Families so selected does not exceed *.
	 
	1.21	 	“Confidential Information” means with respect to each Party, non-public proprietary data or
information that belongs, in whole or in part, to such Party or its Affiliates and/or
information designated as Confidential Information of such Party hereunder, including, but not
limited to, information relating to a Party’s research programs, development, marketing and
other business practices and finances.
	 
	1.22	 	“Contract Year” means, during the Term, the twelve-month time period from the Effective Date
to the anniversary of the Effective Date.
	 
	1.23	 	“Control” or “Controlled” means, with respect to any (a) material, technology, item of
information, method, data or other know-how, or (b) intellectual property right, either
ownership thereof or possession (other than by ownership) of the ability by Avalon or
MedImmune, as the case may be, to grant the other party access and/or a license as provided
herein without breaching the terms of an agreement or other arrangement with a Third Party.
	 
	1.24	 	“Development and Commercialization Program” means all activities performed by MedImmune to
develop a Clinical Candidate into a Product, obtain Regulatory Approval of such Product and
commercialize such Product, including marketing and selling.
	 
	1.25	 	“Disclosing Party” has the meaning defined in Section 8.1.
	 
	1.26	 	“Effective Date” has the meaning set forth in the preamble.
	 
	1.27	 	“FDA” means the United States Food and Drug Administration, and any successor agency(ies)
thereto.
	 
	1.28	 	“Field” means the use by MedImmune of the Avalon Target Know-How * including but not limited
to *.

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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	1.29	 	“First Commercial Sale” means, with respect to any Product and any country of the world, the
first sale of such Product under this Agreement to a Third Party in such country, after such
Product has been granted Regulatory Approval by the competent Regulatory Authorities in such
country.
	 
	1.30	 	“FTE” or “Full Time Equivalent” means a full time equivalent scientific person year
consisting of a total of * of scientific work on or directly related to the Research Program.
Work on or directly related to the Research Program can include, but is not limited to,
experimental preclinical and clinical laboratory and research work, recording and writing up
results, reviewing literature and references, holding scientific discussions, managing and
leading scientific staff, and carrying out management duties related to the Research Program.
The portion of an FTE year devoted by any one employee under this Agreement shall be
determined by dividing the number of hours during any twelve-month period devoted by such
employee *.
	 
	1.31	 	“FTE Rate” means *. The FTE Rate is limited to salary, fringe benefits, overhead and routine
lab supplies (other than those taken into account under Project Reagent Costs on Exhibit B).
	 
	1.32	 	“High Throughput Integrated Transcriptional Screening” or “HITS” means that portion of the
Avalon Patent Rights and/or Avalon Know-How that encompasses a highly modified quantitative
polymerase chain reaction platform used to screen large numbers of compounds by determining
the compounds’ effect on the expression of a given set of genes.
	 
	1.33	 	“Indemnifying Party” has the meaning defined in Section 11.3.
	 
	1.34	 	“IND” means an Investigational New Drug Application, as defined in the United States Food
Drug & Cosmetics Act, that is required to be filed with the FDA before beginning clinical
testing of a Product in human subjects, or an equivalent foreign filing.
	 
	1.35	 	“Joint Inventions” has the meaning set forth in Section 7.1.3.
	 
	1.36	 	“Know-How” means information and data, including, but not limited to, materials, formulae,
procedures, processes, protocols, techniques and results of experimentation and testing.
	 
	1.37	 	“Lead Compound” means a Compound Hit that has been selected for Lead Compound Optimization,
based upon data obtained through secondary screening in various assays performed by the
Parties as outlined in the Research Program.
	 
	1.38	 	“Lead Compound Optimization” means the chemical modification of a Lead Compound, undertaken
by or on behalf of either Party, in order to enhance the Lead

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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	 	 	Compound’s properties, including potency, in vivo efficacy, pharmacokinetic profile,
solubility and other physical chemical characteristics, and/or
decreased toxicity.

	1.39	 	“Management Committee” or “MC” shall have the meaning set forth in Section 3.1.
	 
	1.40	 	“MedImmune Antibodies” means any polyclonal or monoclonal antibody provided by MedImmune to
Avalon that specifically binds to * including, but not limited to, variants, chimeric
antibodies, humanized antibodies, human antibodies, recombinant antibodies, grafted
antibodies, single chain antibodies and fragments or derivatives of any of the foregoing.
	 
	1.41	 	“MedImmune Cells” *.
	 
	1.42	 	“MedImmune Indemnified Party” shall have the meaning set forth in Section 11.2.
	 
	1.43	 	“MedImmune Know-How” means all materials, processes, information, data, databases and
analyses controlled by either MedImmune or its Affiliates as of the Effective Date, or coming
into the control of MedImmune or its Affiliates during the Term, relating to the MedImmune
Antibodies, and MedImmune Cells, including any information relating to cell signaling pathways
involving a Target, and, in all instances, not encompassing any Avalon Patent Rights and/or
Avalon Know-How.
	 
	1.44	 	“MedImmune Patent Rights” means Patent Rights that MedImmune owns or controls as of the
Effective Date or that come into the control of MedImmune during the term of this Agreement,
which Patent Rights claim any MedImmune Invention relating to the MedImmune Antibodies and
MedImmune Cells and not encompassing any Avalon Patent Rights and/or Avalon Know-How.
	 
	1.45	 	“MedImmune Technology” means the MedImmune Antibodies, MedImmune Cells, MedImmune Patent
Rights, MedImmune Know-How and any and all intellectual property rights in data, information,
materials and inventions created and/or invented solely by employees of MedImmune or any Third
Party obligated to assign such data, information, materials and inventions to MedImmune.
	 
	1.46	 	“MedImmune Termination Notice” shall have the meaning set forth in Section 10.3.2.
	 
	1.47	 	“Microarray-based Expanded Transcriptional Screening” or “METS” means that portion of the
Avalon Patent Rights and/or Avalon Know-How encompassing the production and use of gene
microarray platforms used for the in-depth characterization of cell treatments.
	 
	1.48	 	“NDA” means a New Drug Application, as defined in the Food Drug & Cosmetic Act, that is
required to be approved by the FDA before marketing a Product, or an equivalent foreign
filing.

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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	1.49	 	“Net Sales” means the gross invoice price for sales of Products as to each Calendar Quarter
by MedImmune, its Affiliates, or sublicensees, as appropriate, to Third Parties during such
Calendar Quarter, less, if not previously deducted from the amount invoiced or received,
reasonable and customary amounts for: (i) trade, cash and quantity discounts or rebates (other
than price discounts granted at the time of sale), service allowances and broker’s or agent’s
commissions, if any, actually allowed or paid, (ii) refunds, credits or allowances actually
given or made for rejection or return of, previously sold Products or for retroactive price
reductions (including Medicaid, managed care and similar types of rebates); (iii) taxes,
duties or other governmental charges imposed and paid by MedImmune on the production, sale
delivery or use of a Product, (excluding income and franchise taxes), as adjusted for rebates
and refunds; (iv) any administrative fees paid to group purchasing organizations or managed
care entities necessary for the sale of the Product; * provided that MedImmune shall perform a
reconciliation relating to this allowance, as consistent with other MedImmune products and
practices, and provide to Avalon reasonable documentation supporting the reconciliation. A
“sale” of a Product is deemed to occur upon the invoicing, or if no invoice is issued, upon
the earlier of shipment or transfer of title in the Product to a Third Party.
	 
	 	 	All of the foregoing deductions from the gross invoiced sales prices of Licensed Products
shall be determined in accordance with GAAP. In the event that MedImmune, its Affiliates or
Sublicensees make any adjustments to such deductions after the associated Net Sales have
been reported pursuant to this Agreement, the adjustments shall be reported and reconciled
in the next report and payment of any royalties due.
	 
	 	 	In the case of any sale or other disposal of a Product between or among MedImmune, its
Affiliates or sublicensees, for resale, Net Sales shall be calculated as above only on the
gross invoice price of the first arm’s length sale thereafter to an independent Third Party.
	 
	 	 	No royalties shall accrue on the disposition of Product in reasonable quantities by
MedImmune, its Affiliates or sublicensees as samples (promotion or otherwise) or as
donations (for example, to non-profit institutions or government agencies for a
non-commercial or humanitarian purpose).
	 
	 	 	Proceeds from any Product used in a clinical trial will only be included in Net Sales to the
extent MedImmune receives cash compensation for such Product.
	 
	1.50	 	“Notifying Party” has the meaning set forth in Section 7.2.4.
	 
	1.51	 	“Optimized Lead Compound” means a Lead Compound that has undergone Lead Compound
Optimization.
	 
	1.52	 	“Options” has the meaning set forth in Section 5.3.
	 
	1.53	 	“Option Agreement(s)” has the meaning set forth in Section 5.3.

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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	1.54	 	“Patent Rights” means any and all (a) patents, (b) pending patent applications, including,
without limitation, all provisional applications, substitutions, continuations,
continuations-in-part, divisions, renewals, and all patents granted thereon, and (c) all
patents-of-addition, reissues, reexaminations and extensions or restorations by existing or
future extension or restoration mechanisms, including, without limitation, supplementary
protection certificates or the equivalent thereof.
	 
	1.55	 	“Phase I Clinical Trial” means a human clinical trial in the United States that would satisfy
the requirements of US 21 CFR 312.21(a), or in any other country that would satisfy the
analogous, relevant standards in such country.
	 
	1.56	 	“Phase II Clinical Trial” means a human clinical trial in the United States that would
satisfy the requirements of US 21 CFR 312.21(b), or in any other country that would satisfy
the analogous, relevant standards in such country.
	 
	1.57	 	“Phase III Clinical Trial” means a human clinical trial in the United States that would
satisfy the requirements of US 21 CFR 312.21(c), or in any other country that would satisfy
the analogous, relevant standards in such country.
	 
	1.58	 	“Pivotal Registration Clinical Trial” means a human clinical trial the results of which are
intended to generate safety and efficacy data necessary to support Regulatory Approval in the
proposed therapeutic indication, as more fully defined in 21 CFR § 312.21(c) in the United
States and equivalent submissions with similar requirements in other countries.
	 
	1.59	 	“Product” means (a) any pharmaceutical product containing any Compound identified by use of
the Avalon Patent Rights and/or Avalon Know-How as modulating Target activity, (b) any
Compound that is derived from a Compound identified by use of the Avalon Patent Rights and/or
Avalon Know-How as modulating Target activity (including analogs, homologs, salts, isoforms,
enantiomers, polymorphs, prodrugs and compounds with the same or similar structure), or (c)
any Compound derived or identified by Avalon during the Research Program from information
obtained from employing the Avalon Patent Rights and/or Avalon Know-How, including one or more
Lead Compounds, Analogs or Optimized Lead Compounds as an active ingredient.
	 
	1.60	 	“Program Budget” has the meaning defined in Section 5.1.1 and as more fully set forth in
Exhibit B attached hereto.
	 
	1.61	 	“Project Team” has the meaning defined in Section 3.1(c)(ii).
	 
	1.62	 	“Proposed Disclosure” has the meaning defined in Section 8.5.
	 
	1.63	 	“Rapid Assessment of Compound Efficacy, Transcriptional Change and Kinetics” or “RACETraCK”
means those Avalon Patent Rights and/or Avalon Know-How which

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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	 	 	are directed to and/or encompasses the use of HITS or METS in conjunction with animal
disease models to evaluate in vivo Compound activity.
	1.64	 	“Receiving Party” has the meaning defined in Section 8.1.
	 
	1.65	 	“Reference Antibodies” means any non-proprietary (to either Party) * including, but not
limited to, variants, chimeric antibodies, human antibodies, humanized antibodies, recombinant
antibodies, grafted antibodies and single chain antibodies, whether provided by MedImmune or
otherwise.
	 
	1.66	 	“Reference Cells” means any non-proprietary (to either Party) *, whether provided by
MedImmune or otherwise.
	 
	1.67	 	“Reference Compound” means any non-proprietary (to either Party) compound that has a known
chemical structure and known activity.
	 
	1.68	 	“Regulatory Approval” means the technical, medical and scientific licenses, registrations,
authorizations and approvals (including, without limitation, approvals of New Drug
Applications (NDAs), supplements and amendments, pre- and post- approvals, pricing and Third
Party reimbursement approvals, and labeling approvals) of any national, supra-national,
regional, state or local regulatory agency, department, bureau, commission, council or other
governmental entity, necessary for the commercial manufacture, distribution, marketing,
promotion, offer for sale, use, import, export and sale of a Product in a regulatory
jurisdiction.
	 
	1.69	 	“Regulatory Authority” means any national (e.g., the United States Food and Drug
Administration), supra-national (e.g., the European Commission, the Council of the European
Union, or the European Agency for the Evaluation of Medicinal Products), regional, state or
local regulatory agency, department, bureau, commission, council or other governmental entity
in each country of the world involved in the granting of Regulatory Approval for the Product.
	 
	1.70	 	“Research Program” means the Research Program as approved by the MC and to be attached hereto
as Exhibit A, which may be amended from time to time by the MC.
	 
	1.71	 	“SEC” has the meaning defined in Section 8.3.
	 
	1.72	 	“Selected Compound Hit” has the meaning set forth in Section 1.20.
	 
	1.73	 	“Signature Set” means a set of genes explicitly identified by METS during the Research
Program, which provides a unique profile indicative of the inhibition or activation of a
Target.
	 
	1.74	 	“Stage I”, “Stage II” and “Stage III” shall have the respective meanings set forth in
Exhibit A.

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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	1.75	 	“Target” means genes and/or proteins in the *. Should MedImmune exercise the First Option
and/or the Second Option under Section 5.3, “Target” will be amended in such Option
Agreement(s) to refer to the particular target for which the First Option and/or Second Option
is being exercised throughout the Option Agreement, including, but not limited to, the
definition of Avalon Target Know-How.
	 
	1.76	 	“Target Biomarkers” means a set of genes identified by METS during the Research Program which
may be used to identify a therapeutic or prophylactic response in a patient, or predict
patient sensitivity to Reference Antibodies or MedImmune Antibodies, Compound Hits, Lead
Compounds, Lead Compound Analogs, Optimized Lead Compounds, Clinical Candidates and/or
Products.
	 
	1.77	 	“Technology Access Fee” shall have the meaning set forth in Section 5.2.1.
	 
	1.78	 	“Term” shall have the meaning set forth in Section 10.1.
	 
	1.79	 	“Territory” means the world.
	 
	1.80	 	“Third Party” means any person or entity other than Avalon, MedImmune or their respective
Affiliates.
	 
	1.81	 	“T-SAR” means transcriptional structure activity relationship.
	 
	1.82	 	*means any natural or synthetic *.”
	 
	1.83	 	“*” means any molecule or molecular complex, other than an antibody, expressed by a cell that
specifically binds * and exerts an effect on the cell as a result of such binding.
	 
	1.84	 	“Valid Claim” means a claim (i) of any issued, unexpired United States or foreign patent
that shall not have been donated to the public, disclaimed, abandoned nor held invalid or
unenforceable by a court or government agency of competent jurisdiction in an unappealed or
unappealable decision, or (ii) in the case of any United States or foreign patent application,
that shall not have been canceled, withdrawn, or abandoned or pending for more than seven
years from the earliest priority date of such application.
	 
	2.	 	LICENSES.
	 
	2.1	 	Licenses to MedImmune.

          (a) Subject to the terms and conditions of this Agreement, and for the Term, Avalon
grants to MedImmune an exclusive (except to the extent necessary and/or useful for Avalon to
perform its obligations under this Agreement), nontransferable license under the Avalon
Compound Patent Rights, Avalon Compound Know-How

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

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and/or Avalon Target Know-How in the Territory relating to Clinical Candidates(s), with
the right to sublicense, to make, have made, use, have used, sell, have sold, offer to sell,
have offered to sell, or import or have imported, Products and Target Biomarkers.

          (b) Subject to the terms and conditions of this Agreement, Avalon hereby grants to
MedImmune a nonexclusive, nontransferable and non-sublicensable license in the Territory
under the Avalon Patent Rights and Avalon Know-How and/or Avalon Target Know-How to perform
its obligations under the Research Program. The license granted to MedImmune in this
Section 2.1(b), except for MedImmune’s license to the Avalon Target Know-How, which shall be
governed by Section 10.4(d), shall expire upon cessation of all MedImmune’s obligations
under the Research Program or upon termination of the Agreement, whichever is earlier.

          (c) Subject to the terms and conditions of this Agreement, and for the Term, Avalon
grants to MedImmune an exclusive, irrevocable, non-transferable license under the Avalon
Patent Rights, Avalon Know-How and/or Avalon Target Know-How in the Territory for Novel Gene
Target(s), with the right to sublicense, to make, have made, use, have used, sell, have
sold, offer to sell, have offered to sell, or import or have imported any pharmaceutical
product; provided, however, *.

          (d) MedImmune shall have no ownership, use or other rights in or to Avalon Patent
Rights and/or Avalon Know-How or Avalon Compound Patent Rights, Avalon Compound Know-How
and/or Avalon Target Know-How, including METS profiling data, Signature Sets, databases and
other information, and any analyses thereof and all Avalon Core Technology obtained from
the activities conducted in any portion or Stage of the Research Program, except as
explicitly set forth in this Agreement, including, but not limited to, Section 10.4(d).
Without limiting the generality of the foregoing, MedImmune shall not use Signature Sets in
any transcription based screen to identify compounds and/or compound activity or function.

          (e) Notwithstanding anything to the contrary in this Agreement, but subject to Section
2.1(f), the Parties acknowledge and agree that if any gene or any subset of genes within a
Signature Set is not novel (respectively a “Known Gene” or a “Known Gene Subset”), then the
Known Gene or Known Gene Subset shall be deemed to be neither Avalon Technology nor
MedImmune Technology and * but only if * any other person or entity identifies the Known
Gene or Known Gene Subset in research and/or experiments that are independent of * and
independent of any data and/or analyses *. For the purposes hereof, a Known Gene is any
gene within a Signature Set for which at least a partial genomic sequence has been publicly
disclosed and for which the expression thereof has been publicly disclosed as it relates to
the Target signaling pathway; and a Known Gene Subset is a set of genes from a Signature Set
which comprises less than or equal to all the genes in the Signature Set, but in which all
genes are Known Genes.

 

			
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          (f) Except to perform its obligations under the Research Program, Avalon shall not use
* the Signature Set or Signature Sets comprising such data that are used to derive any
Clinical Candidate.

	2.2	 	Licenses to Avalon.

          (a) Subject to the terms and conditions of this Agreement, MedImmune hereby grants to
Avalon a nonexclusive, nontransferable and non-sublicensable license in the Territory under
the MedImmune Technology solely to perform its obligations under the Research Program.
Except as expressly set forth in this Agreement, Avalon shall not use the MedImmune
Technology for any other purpose. The license granted to Avalon in this Section 2.2: (a)
shall expire upon cessation of all Research Program activities or (b) upon termination of
the Agreement, whichever is earlier

          (b) MedImmune hereby grants to Avalon an exclusive, worldwide, perpetual, irrevocable,
royalty free and fully paid up license to use, for any purpose, MedImmune’s interest in
Joint Inventions that constitute Avalon Core Technology. This license shall survive the
termination or expiration of this Agreement.

	2.3	 	Sublicensing to Third Party Contractors. Notwithstanding any provision to the contrary in
this Agreement, if pursuant to Section 3.1(c)(iii), the MC approves the use of one or more
Third Parties to perform certain tasks for either Party under the Research Program, the Party
entering into a contract with such Third Party for the performance of such services, may, as
part of such contract, grant to such Third Party a nonexclusive, nontransferable,
nonsublicensable license or sublicense, as applicable, under the Avalon Patent Rights and/or
Avalon Know-How or the MedImmune Technology, as applicable, only to the extent and only for so
long as such license or sublicense is necessary for such Third Party to perform such tasks
under the Research Program. A Party entering into any Third Party licenses or sublicenses, as
applicable, must require the Third Party to execute a confidential disclosure agreement with
terms and covenants relating to the protection of confidential information and intellectual
property reasonably acceptable to the other Party. Notwithstanding anything to the contrary,
no rights in or to the Avalon Core Technology may be licensed or sublicensed without the
express prior written consent of Avalon. Notwithstanding anything to the contrary, no rights
in or to the MedImmune Technology may be licensed or sublicensed without the express prior
written consent of MedImmune. 
	 
	2.4	 	No Other Licenses. The Parties expressly understand and agree that the only licenses granted
under this Agreement are the licenses expressly granted under this Agreement and that there is
no implied license or license by estoppel.

 

			
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	3.	 	MANAGEMENT OF COLLABORATION.
	 
	3.1	 	Management Committee

          (a) Formation and Composition of the Management Committee. The MC shall have
general supervision over the strategic direction and management of the Research Program.
The MC shall conduct its first meeting no later than forty-five (45) days after the
Effective Date. The MC shall comprise two representatives each from Avalon and MedImmune.
Each Party shall appoint its representatives to the MC from time to time, and may substitute
one or more of its representatives to the MC, in its sole discretion, effective upon written
notice to the other Party of such change. The two MC members appointed by each Party shall
have a combined, single vote on all actions before the MC, and unanimous agreement of both
Parties is required for approval of any actions, subject to Section 3.2 below. The initial
members of the MC for MedImmune are *.

          (b) Meetings. MedImmune shall be responsible for organizing and chairing the
MC meetings. The MC shall meet not less than once each Calendar Quarter during the duration
of the Research Program, on such dates and at such times as agreed to by the Parties.
In-person meetings shall take place in Avalon’s offices or such other locations on which the
Parties mutually agree. Upon the mutual agreement of the Parties, any MC meeting may be
conducted by telephone or videoconference. At such meetings, the MC shall discuss the
activities conducted under the Research Program and the results thereof. Each Party shall
be responsible for its own costs in connection with the meetings of the MC. In addition to
the MC members, each Party may invite other employees and/or consultants to attend and
participate in such meetings upon notice to and approval by the MC, such approval not to be
unreasonably withheld or delayed. Any consultant shall be bound to terms of confidentiality
at least as restrictive as those contained herein.

          (c) Purpose and Powers of Management Committee. The MC shall have
responsibility for the following identified matters, which may be amended, subtracted from
or added to or from time to time upon the mutual written agreement of the Parties:

               (i) Preparing and providing the minutes of each MC meeting to the Parties pursuant to
Section 3.1(e).

               (ii) Forming and supervising a team of members from each Party, who have been nominated
by their respective Party (the “Project Team”), which will monitor, and coordinate the
performance of the Research Program. The MC may periodically make amendments or supplements
to the Research Program, as it deems necessary to accomplish the purposes of the Research
Program, subject to the provisions of Section 3.2 and Article 5.

               (iii) Approving the utilization of one or more Third Parties to perform certain tasks
for either Party under the Research Program.

 

			
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               (iv) Identifying * to be used in Stage I of the Research Program.

               (v) Deciding on further Compound screening based on pilot screen.

               (v) Selecting Lead Compounds for Lead Optimization, based on criteria developed and
approved by the MC in writing prior to the end of Stage III of the Research Program and
making recommendations of such Lead Compounds to MedImmune’s Executive Committee. Such
selection criteria will include, but will not be limited to, intellectual property analysis.

               (vi) Reporting on the progress of the Research Program to Avalon and MedImmune.

               (vii) Review and approval of the Program Budget and proposed changes to the Program
Budget.

               (viii) Defining, in writing, the criteria for achievement of the milestone event “Proof
of Concept of a Compound Hit or Lead Compound” in an animal model” set forth in Section
5.2.2 no later than * from the Effective Date or such other time unanimously agreed to by
the members of the MC.

               (ix) Defining, in writing, the criteria for selection of a Clinical Candidate no later
than * from the Effective Date or such other time as unanimously agreed upon by the members
of the MC.

          (d) Minutes. Within * following each MC meeting, a representative of each
Party to the MC, on an alternating basis, shall prepare and provide to each Party a copy of
the minutes of such meeting which shall set forth, in reasonably specific detail, the state
of the Research Program and any approval, determination or other action agreed to by all of
the members of the MC, provided that such minutes are reasonably acceptable to both Parties.
The minutes shall be approved at the next meeting of the MC, if not sooner.

          (e) Notwithstanding anything to the contrary, the decisions or actions of the MC shall
not in any way change the terms of this Agreement or constitute an amendment this Agreement,
unless in compliance with Section 14.5 of this Agreement.

	3.2	 	Management Committee Disputes. Any disputes or disagreements arising from the planning or
performance of the Research Program that cannot be resolved by the members of the MC shall be
resolved in accordance with this Section 3.2. If the MC cannot reach consensus * after it has
met and attempted to reach such consensus, the matter shall then be immediately referred to
the Chief Executive Officer of Avalon, or such other person holding a similar position
designated by Avalon from time to time, and a senior officer of MedImmune designated by the
Chief Executive Officer of MedImmune, from time to time, for resolution. The executive/senior
officers shall use

 

			
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	 	 	reasonable efforts to resolve the matter referred to them. If the executive/senior officers
cannot reach a mutually acceptable decision * after the matter was referred to them, then *.
The Parties acknowledge and agree that the provisions of this Section 3.2 are intended to
apply to decisions regarding the purposes and powers identified * and related decisions
concerning * and are not intended to apply to disputes regarding * and/or (ii) whether or
not * in accordance with * under this Agreement; and/or (iii) whether or not * all of which
shall be subject to the provisions of Article 13. In addition, the Parties acknowledge and
agree that the provisions of this Section 3.2 shall not permit * this Agreement and/or
require * to perform any action or take any measure under * has not been allowed * pursuant
to this Agreement.
	 
	3.3	 	MedImmune Executive Committee. The MedImmune Executive Committee shall review and approve
recommendations from the MC of Lead Compounds selected for Lead Optimization prior to the
initiation of Stage III.
	 
	4.	 	RESEARCH AND DEVELOPMENT.
	 
	4.1	 	General. Under the terms and conditions set forth herein, Avalon shall perform, with
collaboration from MedImmune, a research program for the discovery, identification, screening,
characterization and optimization of Compounds and Products active against Targets
(collectively, the “Research Program”). The Research Program is set forth in Exhibit
A attached hereto.
	 
	4.2	 	Term of the Research Program. Unless this Agreement is earlier terminated, the Research
Program shall terminate when the optimization of the final Lead Compound selected for Lead
Compound Optimization has been completed. It is expected that the Research Program will take
approximately * to complete, which can be extended upon the mutual written agreement of the
Parties or terminated by MedImmune in accordance with Section 10.3.2.
	 
	4.3	 	Conduct of the Research Program. Avalon and MedImmune shall each use its respective
Commercially Reasonable Efforts to perform its obligations under the Research Program. All
activities to be undertaken in the performance of the Research Program shall be carried out by
employees of the Parties and/or their respective Affiliates, provided,
however, that if either Party is able to reasonably demonstrate, and the MC agrees,
that it would be in the best interests of both Parties to contract with one or more Third
Parties to perform certain tasks under the Research Program, the Party responsible for such
task may enter into a contract with a Third Party to perform such task, which contract shall
be subject to the prior written approval of the MC and to obligations of confidentiality at
least as stringent as those contained in this Agreement; provided that entering into an
agreement with a Third Party shall not relieve a Party from the performance of its obligations
under this Agreement. In determining whether to utilize the services of any Third Party in
conducting activities under the Research Program, the Parties shall consider what would be the
most efficient and cost-effective means for accomplishing the proposed activity, any relevant
intellectual property issues

 

			
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	 	 	that may impede a Third Party’s ability to perform the proposed activity or that may warrant
limiting the performance of the proposed activity to one of the Parties, and other relevant
factors.
	 
	4.4	 	No Liability of Avalon. Notwithstanding the foregoing or any other provision of this
Agreement, MedImmune acknowledges and agrees that the Research Program is experimental in
nature and that Avalon does not make any representations or warranties regarding the success
of the Research Program, and Avalon shall have no liability to MedImmune as a result of any
failure to achieve or delay in achieving any results under the Research Program or any
Development and Commercialization Program provided that Avalon has used Commercially
Reasonable Efforts.
	 
	5.	 	RESEARCH PROGRAM FUNDING, PAYMENTS AND ROYALTIES.
	 
	5.1	 	Research Program Funding. MedImmune shall be solely responsible for funding the Research
Program in accordance with the Program Budget (as defined herein).

5.1.1 Budget. The budget detailing the expected costs per Contract Year for
performing the Research Program (the “Program Budget”) is attached hereto as Exhibit
B. The Parties understand and agree that MedImmune shall not be obligated to make any
payments to Avalon under this Section 5.1 beyond those amounts set forth in the Program
Budget or otherwise approved in advance by the MC in writing, if such expenditure is greater
than * of the agreed upon expenditure level. At the end of each Contract Year and/or the
termination or expiration of the Research Program, if applicable, the Parties shall
reconcile the amounts paid by MedImmune to Avalon. Any overpayment due to MedImmune shall
be refunded to MedImmune within * after such reconciliation.

5.1.2 Payment. MedImmune agrees to provide funding to Avalon *.

5.1.3 Reporting and Records. Avalon shall provide MedImmune with a quarterly update
of results obtained by MedImmune under the Research Program. During the Research Program,
each Party shall maintain, and shall require its Affiliates, sublicensees and any Third
Party permitted to perform work under the Research Program in accordance with Section 4.3 to
maintain, records in sufficient detail and in good scientific manner appropriate for
regulatory purposes and the purpose of establishing and perfecting intellectual property
(including patent rights), which shall fully and properly reflect all work done and results
achieved in the conduct of the Research Program. All agreements entered into with a Third
Party will have provisions that provide that any intellectual property rights will either be
owned by or assigned to MedImmune or Avalon, as the case may be.

5.1.4 Visitation. Upon not less than one week prior written notice, during the
Research Program, MedImmune shall have the right to visit the premises where research is
being performed under the Research Program. In such case, Avalon agrees to make

 

			
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scientists performing research under the Research Program reasonably available to discuss
the research and progress thereof under the Research Program with MedImmune.

	5.2	 	MedImmune Payments and Royalties; Option.

5.2.1 Technology Access Fee. After the Effective Date and receipt of an invoice
from Avalon, MedImmune shall pay to Avalon a technology access fee of $1,500,000 (the
“Technology Access Fee”) no later than June 24, 2005.

5.2.2 Milestone Payments. MedImmune shall pay to Avalon the following milestone
payments upon the each occurrence of the applicable milestone event described below on a
Product-by-Product basis, subject to Section 3.1(c) (viii). Milestone payments shall be
payable by MedImmune to Avalon within * after achievement of the relevant Milestone and
receipt of an invoice for such amounts. Each such milestone payment is paid only once upon
the first achievement of the corresponding milestone event on a Product-by-Product basis.

	 	 	 
	Milestone Payment	 	Milestone Event
	*

	 	Selection of Compound Famil(y/ies) for Lead
Compound Optimization
	 
	 	 
	*

	 	Proof of concept of a Compound Hit or Lead
Compound in an animal model
	 
	 	 
	*

	 	Selection of a Clinical Candidate
	 
	 	 
	*

	 	First dosing in a human being in a Phase I
Clinical Trial
	 
	 	 
	*

	 	First dosing in a human being in a Pivotal
Registration Clinical Trial or the date of agreement by the FDA that a
trial not originally designated as a Pivotal Registration Clinical
Trial could be used for registration
	 
	 	 
	*

	 	Filing of an NDA for a Product
	 
	 	 
	*

	 	Approval of an NDA for a Product
	 
	 	 
	*

	 	First Commercial Sale in Europe
	 
	 	 
	*

	 	First Commercial Sale in Japan
	 
	 	 
	*

	 	Clinical validation of the first Target
Biomarker

 

			
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	Milestone Payment	 	Milestone Event
	 

	 	(this milestone payment will not be due if
achievement of this milestone event is part of a
Development Program for a Product)

5.2.3 Royalty. In consideration for the license by Avalon to MedImmune
hereunder, MedImmune shall pay to Avalon within * days of the close of each Calendar Quarter
a royalty in an amount equal to the following percentages of the specified portions of the
annual aggregate Net Sales of Products sold by MedImmune, its Affiliates, and its
sublicensees throughout the Territory as reported in a Calendar Quarter as provided below:

	 	 	 
	Net Sales	 	Royalty
	Amounts from * up to and including *

	 	*
	Amounts in excess of *

	 	*

          (a) The obligation of MedImmune to pay royalties using the rates set forth in this
Section 5.2.3 on Net Sales of Product in any country of the Territory will continue, on a
country-by-country and Product-by-Product basis, until the later of (i) the expiration of
the period during which the manufacture, use, sale offer for sale or import of a Product
sold in such country would infringe a Valid Claim under Avalon Compound Patent Rights in
such country, or (ii) the date which is * from the date of First Commercial Sale of such
Product in such country (such time period, the “Royalty Period”).

          (b) For the avoidance of doubt: (i) no royalty is due for any Product in any country
after the end of the Royalty Period for such country and in calculating Net Sales for
determining the applicable royalty rate under Section 5.2, Net Sales of a Product do not
include net sales in a country after the end of the Royalty Period for such country; and
(ii) during the term of any applicable Royalty Period in any country, MedImmune shall have
no right to sell or market any Product, directly or indirectly, without paying to Avalon the
royalties set forth in this section.

          (c) If any Valid Claim owned by a Third Party is asserted against MedImmune in any
country for which a royalty payment is due hereunder, then *.

          (d) Notwithstanding any provision to the contrary, in the event that MedImmune
reasonably demonstrates to Avalon that any Third Party pharmaceutical product identical to
any Product for which MedImmune owes royalties hereunder has achieved a market share *
country and the Parties have reasonably concluded that the marketing or sale of such Third
Party product does not infringe any Valid Claim Controlled by either Party and relating to
such Product in such country, then the royalty payment due under this section *.

 

			
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5.2.4 Method of Payment. All payments under this Agreement shall be made payable to
“Avalon Pharmaceuticals” and sent to the address identified in Section 14.4, or by wire
transfer to an account designated in writing by Avalon. Each payment shall reference this
Agreement and identify the obligation under this Agreement that the payment satisfies.

5.2.5 Payments in U.S. Dollars. All payments due under this Agreement shall be
drawn on a United States bank and shall be payable in United States dollars. Such payments
shall be without deduction of exchange, collection, or other charges, and, specifically,
without deduction of withholding or similar taxes or other government imposed fees or taxes.

5.2.6 Conversions. For any given Calendar Quarter, if any portion of Net Sales
would be otherwise determined in currency other than U.S. Dollars then, for the purposes of
calculating such Net Sales, such currency will be converted to U.S. Dollars in the following
manner:

          (a) Net Sales will be determined in the original currency for each country for each of
the three (3) months during the Calendar Quarter; then

          (b) the Net Sales values for each month as calculated under Section 5.2.6(a) for each
country will be separately converted into U.S. Dollars based on the average rate of exchange
for that month (based on daily noon buying rates for cable transfers in New York City
certified by the Federal Reserve Bank of New York, available on the website for the Board of
Governors of the Federal Reserve System (or any successor entity)) ; and then

          (c) the portion of Net Sales attributable to that currency for that Calendar Quarter
will be the sum of the three (3) monthly values calculated under Section 5.2.6(b).

5.2.7 Late Payments. Any payments by MedImmune that are not paid on or before the
date such payments are due under this Agreement shall bear interest at the lesser of the
greatest amount permitted by law or * prorated from the date when such payment was due.

5.2.8 Fully Earned, Non-Refundable and Non-Creditable. All payments made by
MedImmune under this Agreement due and owing to Avalon shall be deemed to be fully earned,
non-refundable and non-creditable at the time payment is made, subject to Section 6.2.

	5.3	 	Option. MedImmune and Avalon may be interested in pursuing additional collaborations. Avalon
grants to MedImmune options (the “First Option” and the “Second Option,” and together, the
“Options”) to enter into up to two additional collaboration and license

 

			
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	 	 	agreements (the “Option Agreement(s)”) concerning targets other than the Target; provided
that: (a) MedImmune may exercise either or both of the Options by delivery of written notice
to Avalon accompanied by (i) the payment of * for each Option Agreement, which amount shall
constitute the Technology Access Fee for each of the Option Agreements, and (ii) a
description of the proposed subject matter of the Option Agreement. Each of the Option
Agreements shall be identical to this Agreement in form and substance, except concerning the
Technology Access Fee, the subject matter of each Option Agreement and conforming
definitional changes, the lack of this Option provision, and except as mutually agreed to by
the Parties. The subject matter of each Option Agreement shall be left to the discretion of
MedImmune, unless Avalon has already entered into or is in the process of entering into an
agreement with a Third Party or unless Avalon is pursuing a research or development program
that may preclude Avalon from entering into an Option Agreement with MedImmune concerning the
proposed subject matter. In the event that Avalon notifies MedImmune of such determination,
then such Option exercise shall not count against the two exercises permitted hereunder, and
Avalon shall have no liability for failing to enter into an Option Agreement pursuant to such
Option exercise or for failing to disclose any of the facts to MedImmune underlying Avalon’s
determination. In the event that the Parties do not enter into an Option Agreement, any
payments provided by MedImmune to Avalon shall be refunded to MedImmune within *. MedImmune
shall have the right to exercise the First Option by delivery of written notice to Avalon
under this Section 5.3 until * and shall have the right to exercise the Second Option by
delivery of written notice to Avalon under this Section 5.3 *.
	 
	6.	 	ACCOUNTING AND RECORDS.

6.1 Royalty Reports; Records. During the Term and following the first Commercial Sale by
MedImmune or its Affiliates or sublicensees, as the case may be, of a Product in the
Territory, MedImmune shall furnish to Avalon, within * after the close of each Calendar
Quarter, a written report or reports covering each Calendar Quarter, which report will set
forth separately for each Product, in reasonable detail, the calculation of the royalties
and/or other payments due from MedImmune, its Affiliates and sublicensees, including, for
example, in the case of royalty payments, the gross amount billed or invoiced for the sale
or distribution of the Product, itemized deductions against such gross amount, and Net Sales
on a country-by-country and Product-by-Product basis. Such report shall contain reference
to Net Sales by country in United States Dollars. MedImmune shall have the right to make
corrections to the reports for each Calendar Quarter for any errors in calculation of any
royalty or other payment due under this Agreement. Upon the expiration of * following the
end of any Calendar Quarter, the calculation of royalties and/or other payments due from
MedImmune with respect to such Calendar Quarter shall be binding and conclusive upon Avalon,
and MedImmune, its Affiliates or sublicensees, as the case may be, shall be released from
any liability or accountability with respect to such royalties and/or other payments for
such Calendar Quarter. * If no payment is due for any such Calendar Quarter, MedImmune
shall so report. MedImmune agrees to discuss any report and the information contained
therein in

 

			
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good faith with Avalon, should questions regarding such reports arise. MedImmune shall keep,
and shall require its Affiliates and sublicensees to keep, accurate records in sufficient
detail to enable royalties payable hereunder (and all related calculations) to be
determined. Such records will be maintained until Avalon’s right to audit under Section 6.2
has expired.

	6.2	 	Right to Audit. Upon the written request of Avalon and with at least * prior written notice,
but not more than * and at Avalon’s expense, MedImmune shall permit an independent certified
public accounting firm of internationally recognized standing, selected by Avalon and
acceptable to MedImmune, which acceptance will not be unreasonably refused, to have access
during normal business hours to those records of MedImmune as may be reasonably necessary to
verify the accuracy of the milestone payments or the royalty reports furnished by MedImmune
pursuant to Section 6.1 of this Agreement in respect of any year ending not more than * prior
to the date of such request. The report prepared by such independent certified public
accounting firm will disclose only the conclusions of the accounting firm regarding the audit
and specify the amount of any underpayment or overpayment, and will not include copies of any
books or records reviewed. A copy of such report will be sent or otherwise provided to
MedImmune by such accounting firm at the same time it is sent or otherwise provided to Avalon.
No other information obtained by the accounting firm will be shared with Avalon. If the
accounting firm’s report shows underpayment of royalties, within * after MedImmune ‘s receipt
of such report, MedImmune shall remit to Avalon the amount of such underpayment. If the
underpayment is in excess of * then MedImmune shall also remit to Avalon an amount equal to
Avalon’s substantiated out-of-pocket costs of the audit. Any overpayment of royalties shall
be refunded to MedImmune by Avalon within * of the date Avalon receives the written report of
the accounting firm. Avalon shall treat all financial information subject to review under
this Section 6.2 as Confidential Information of MedImmune and shall cause its accounting firm
to retain all such financial information in confidence under terms at least as restrictive as
those set forth in Article 8.
	 
	7.	 	PATENT PROSECUTION; ENFORCEMENT; INFRINGEMENT, OWNERSHIP OF INVENTIONS.
	 
	7.1	 	Ownership.

7.1.1 Avalon shall solely own all right, title and interest in and to the Avalon Technology,
subject to the licenses granted to MedImmune in this Agreement and Section 10.4.

7.1.2 MedImmune shall solely own all right, title and interest in and to the MedImmune
Technology, subject to the license granted to Avalon in Section 2.2 of this Agreement.

7.1.3 Subject to Section 7.1.4, all right, title and interest in and to any inventions
made by one or more employees or contractors of MedImmune together with one or more

 

			
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employees or contractors of Avalon during the Research Program (“Joint Inventions”),
including Third Parties performing work under the Research Program, shall belong jointly to
MedImmune and to Avalon, such that each party shall have an undivided interest therein.
Subject to the licenses granted under this Agreement, and the payment obligations under this
Agreement, each party shall have the right to exploit and grant rights to Joint Inventions
without the consent or approval of the other Party and without accounting to the other
Party. For the avoidance of doubt, MedImmune shall have no rights regarding Joint
Inventions that are Avalon Core Technology except to the extent necessary to enable
MedImmune to perform its obligations under Section 2.2(b). Additionally, for the avoidance
of doubt, Avalon shall have no right to use Joint Inventions to the extent such Joint
Inventions consist of, in whole or in part, Avalon Target Know-How, Target Biomarker(s)
and/or Novel Gene Target(s).

7.1.4 Each Party agrees promptly to disclose to the other party any Joint Invention and to
execute such documents and perform such other acts as may reasonably request to obtain,
perfect and enforce such rights to such inventions and the assignment thereof. MedImmune
and Avalon will obtain appropriate assignments from its employees, contractors and
Affiliates to effect the intent of this Section 7.1.4.

7.1.5 Inventorship shall be determined in accordance with United States patent law.

	7.2	 	Patent Rights.

7.2.1 Prosecution and Maintenance of Patent Rights.

          (a) Avalon Core Technology. Avalon shall have the sole right, but not the
obligation, to prepare, file, prosecute and maintain, throughout the world, all patent
applications relating to the Avalon Core Technology.

          (b) MedImmune Patent Rights. MedImmune, at its own discretion and expense
through patent counsel selected by MedImmune, shall have the sole right, but not the
obligation, to prepare, file, prosecute and maintain, throughout the world, all MedImmune
Patent Rights, including any interference, opposition or related proceedings for such Patent
Rights.

          (c) Collaboration Technology. MedImmune shall have the first right, but not
the obligation, to prepare, file, prosecute and maintain, throughout the world, all patents
directed to (i) Avalon Target Know-How, (ii) Avalon Compound Know-How, (iii) Avalon Compound
Patent Rights, and (iv) Patent Rights in all Joint Inventions, in each case excluding all
patents directed to Avalon Core Technology (collectively, “Collaboration Patent Rights”).
MedImmune shall give Avalon an opportunity to review and comment upon the text of these
applications before filing, shall consult with Avalon with respect to such applications, and
shall supply Avalon with a copy of the applications as filed, together with notice of its
filing date and serial number. MedImmune shall keep Avalon advised of the status of the
actual and prospective patent

 

			
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filings (including, without limitation, the grant of any Collaboration Patent Rights),
and shall provide advance copies of any official correspondence related to the filing,
prosecution and maintenance of such patent filings. MedImmune shall use commercially
reasonable efforts to prepare, file, prosecute and maintain Collaboration Patent Rights in a
diligent manner. If MedImmune elects not to file a patent application or to cease the
prosecution and/or maintenance of any Collaboration Patent Right (excluding Avalon Target
Know-How), MedImmune shall provide Avalon with written notice immediately upon the decision
to not file or continue the prosecution of such patent application or maintenance of such
patent and at least * before ceasing prosecution and/or maintenance of a particular
Collaboration Patent Right and, in such case, shall permit Avalon, at Avalon’s sole
discretion, to file and/or continue prosecution and/or maintenance of such Collaboration
Patent Right at Avalon’s own expense. If Avalon so elects to file and/or continue
prosecution or maintenance, MedImmune shall execute such documents and perform such acts, at
Avalon’s expense, as may be reasonably necessary to permit Avalon to file, prosecute and/or
maintain such Collaboration Patent Rights. Notwithstanding the forgoing, Avalon shall not
file or prosecute any patent applications that disclose Avalon Target Know-How without the
prior express written permission of MedImmune, in MedImmune’s sole discretion.

7.2.2 Enforcement of Intellectual Property.

          (a) Enforcement of Patent Rights and Know-How. Each Party shall give prompt
notice to the other Party of knowledge of either (i) any infringement of the Avalon Patent
Rights directed to the Avalon Core Technology or the Collaboration Patent Rights, or (ii)
any misappropriation or misuse of Avalon Know-How or MedImmune Know-How that comes to such
Party’s attention.

          (b) With respect to Avalon Patent Rights, Patent Rights in Joint Inventions directed to
the Avalon Core Technology and/or Avalon Know-How directed to the Avalon Core Technology,
Avalon shall have the sole right, but not the obligation, to take action to obtain a
discontinuance of such infringement or bring suit against the Third Party infringer.

          (c) With respect to all other Patent Rights and Know-How, MedImmune shall have the
first right, but not the obligation, to take action to obtain a discontinuance of such
infringement or bring suit against the Third Party infringer within * from the date of said
notice. MedImmune shall provide Avalon with prompt written notice within the * period as to
whether MedImmune will take action against the Third Party infringer. MedImmune shall bear
all the expenses of any suit brought by it claiming infringement of any such Patent Rights
and/or Know-How. If, after the expiration of the * period, MedImmune has not obtained a
discontinuance of infringement, filed suit against any Third Party infringer, or provided
Avalon with information and arguments demonstrating to Avalon’s reasonable satisfaction that
there is insufficient basis for the allegation of infringement, then Avalon shall have the
right, but not the obligation, to bring suit against such infringer under such Patent Rights
and/or

 

			
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Know-How and to join MedImmune as a party plaintiff, provided that Avalon shall bear
all the expenses of such suit. MedImmune shall cooperate with Avalon in any suit for
infringement of such Patent Rights and/or Know-How brought by Avalon against a Third Party,
and shall have the right to consult with Avalon and to participate in and be represented by
independent counsel in such litigation at its own expense.

7.2.3 Disbursement of Damages Award and Settlement. The Party prosecuting or
participating in any such lawsuit under Section 7.2.2 hereof shall be entitled to deduct its
costs and expenses from any damages that are awarded. The balance remaining from any such
recovery shall be divided between the Parties as follows (i) to the extent that damages are
based on lost profits, the Party that did not control the suit shall receive an amount equal
to the royalties, in case of Avalon or revenues, in case of MedImmune, that it would receive
if sales by the allegedly infringing party of the allegedly infringing product (for which
lost profits were recovered) were considered to be Net Sales under this Agreement and *.
The Parties shall cooperate fully in any such lawsuit and each Party shall not take or omit
any action that would interfere with prosecution of such a lawsuit. Before any action is
taken that will affect the validity of any rights (including the Avalon Patent Rights) or
before such lawsuit is settled or compromised, the Parties shall promptly consult and
reasonably cooperate in good faith with one another to minimize the extent to which the
rights granted by this Agreement (including the Avalon Patent Rights) are materially
adversely affected by any such act, settlement or compromise.

7.2.4 Infringement of Intellectual Property Rights of Third Parties. If either
Party becomes aware of an allegation by a Third Party of infringement resulting from the
practice of the Avalon Patent Rights or MedImmune Patent Rights, or in the event of the
initiation of any legal action by or against MedImmune or Avalon with regard to any alleged
infringement of the Avalon Patent Rights or MedImmune Patent Rights, such Party (the
“Notifying Party”) shall promptly notify the other Party of all relevant facts and
circumstances known by the Notifying Party in connection therewith. The Parties shall meet
to discuss in good faith whether or not both Parties agree that such Third Party rights are
necessary to conduct the Research Program or to make, have made, use, offer for sale, sell,
supply or import a Product, and which Party if any shall institute an action against said
Third Party or secure such Third Party rights. If either MedImmune or Avalon institute an
action pursuant hereto, such instituting Party shall in a timely manner keep the other Party
informed and provide copies to such other Party of all pleadings and other documents as such
other Party may reasonably request regarding all such proceedings or actions instituted by
said instituting party. Each Party shall control the defense of any infringement action
brought against such a Party by a Third Party, and if such an action is brought against both
Parties, the Parties shall cooperate with each other in the defense thereof.

 

			
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	8.	 	CONFIDENTIALITY.
	 
	8.1	 	Confidentiality. Except to the extent expressly authorized by this Agreement or otherwise
agreed in writing, the Parties agree that, for the term of this Agreement and for ten (10)
years thereafter, each Party (the “Receiving Party”), receiving hereunder any Confidential
Information of the other Party (the “Disclosing Party”) shall keep such Confidential
Information confidential and shall not publish or otherwise disclose or use such Confidential
Information for any purpose other than as provided for in this Agreement except for
Confidential Information that the Receiving Party can establish:

          (a) was already known to the Receiving Party (other than under an obligation of
confidentiality), at the time of disclosure by the Disclosing Party and such Receiving Party
has documentary evidence to that effect;

          (b) was generally available to the public or otherwise part of the public domain at the
time of its disclosure to the Receiving Party;

          (c) became generally available to the public or otherwise part of the public domain
after its disclosure or development, as the case may be, and other than through any act or
omission of a Party in breach of this confidentiality obligation;

          (d) was disclosed to that Party, other than under an obligation of confidentiality, by
a Third Party who had no obligation to the Disclosing Party not to disclose such information
to others;

          (e) was independently discovered or developed by or on behalf of the Receiving Party
without the use of the Confidential Information belonging to the other Party and the
Receiving Party has documentary evidence to that effect.

	8.2	 	Authorized Disclosure and Use.

8.2.1 Disclosure. Notwithstanding the foregoing Section 8.1, each Party may
disclose Confidential Information belonging to the other Party to the extent such disclosure
is reasonably necessary to:

          (a) file or prosecute patent applications claiming Avalon or MedImmune Inventions;

          (b) prosecute or defend litigation arising under this Agreement;

          (c) exercise rights hereunder provided such disclosure is covered by terms of
confidentiality similar to those set forth herein;

          (d) comply with applicable governmental laws and regulations;

 

			
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          (e) permit disclosure by MedImmune to governmental or other regulatory agencies in
order to gain or maintain approval to conduct clinical trials or to market Product, but such
disclosure may be made only to the extent necessary to obtain such authorizations; and

          (f) permit Avalon to share terms of this agreement under appropriate Confidentiality
Agreement with bona fide potential investors and related parties or in connection with a
disposition or proposed disposition of Avalon’s assets or stock.

          (g) is deemed necessary by MedImmune to be disclosed to sublicensees, Affiliates,
agents, consultants, or other Third Parties for the research, development, manufacture, use
or commercialization of Product, or in connection with a licensing transaction related to
Product or loan, financing or investment or acquisition, merger, consolidation or similar
transaction (or for such entities to determine their interest in performing such
activities), in each case on the condition that any Third Parties to whom such disclosures
are made agree to be bound by confidentiality and non-use obligations substantially similar
to those contained in this Agreement.

     Notwithstanding the disclosures permitted under subsections (d), (e), (f) and (g), if the
information, documents or materials covered by such subsection are otherwise protected by
obligations of confidentiality, then the confidentiality obligations of Section 8.1 shall
still apply, consistent with such disclosures. In the event a Party shall deem it necessary
to disclose pursuant to this Section 8.2.1, Confidential Information belonging to the other
Party, the Disclosing Party shall to the extent possible give reasonable advance notice of
such disclosure to the other Party and take reasonable measures to ensure confidential
treatment of such information.

     8.2.2 Use. Each Party shall have the right to refuse to accept the other Party’s
Confidential Information. Each Party shall use at least the same standard of care with
regard to the Confidential Information of the other Party as it uses to protect its own
confidential information. Each Party shall have the right to use the other Party’s
Confidential Information in carrying out its respective responsibilities under this
Agreement in the conduct of the Research Program or a Development Program, or for any
purpose under this Agreement.

	8.3	 	SEC Filings. Either Party may disclose the terms of this Agreement to the extent required,
in the reasonable opinion of such Party’s legal counsel, to comply with applicable laws,
including without limitation the rules and regulations promulgated by the United States
Securities and Exchange Commission (the “SEC”). Notwithstanding the foregoing, before
disclosing this Agreement or any of the terms hereof pursuant to this Section 8.3, the Parties
will consult with one another on the terms of this Agreement to be redacted in making any such
disclosure. If a Party discloses this Agreement or any of the terms hereof in accordance with
this Section 8.3, such Party agrees, at its own expense, to seek confidential treatment of
portions of this Agreement or such terms, as may be reasonably requested by the other Party.

 

			
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	8.4	 	Publications. During the term of the Research Program, each Party will submit to the other
Party for review and approval all proposed academic, scientific and medical publications and
public presentations relating to the Research Program, Lead Compounds, Clinical Candidates, or
Products for review in connection with preservation of Patent Rights and/or to determine
whether Confidential Information should be modified or deleted. Written copies of such
proposed publications and presentations shall be submitted to the non-publishing Party no
later than * before submission for publication or presentation and the non-publishing Party
shall provide its comments with respect to such publications and presentations within * of its
receipt of such written copy. The review period may be extended for an additional * in the
event the non-publishing Party can demonstrate a reasonable need for such extension including,
but not limited to, the preparation and filing of patent applications. By mutual agreement,
this period may be further extended. Avalon and MedImmune shall each comply with standard
academic practice regarding authorship of scientific publications and recognition of
contribution of other parties in any publications relating to the Research Program, Lead
Compounds, Clinical Candidates, or Products. In no event, however, will Avalon publish or
release any information regarding the MedImmune Antibodies, MedImmune Cells and/or Avalon
Target Know-How without the prior, express written consent of MedImmune.
	 
	8.5	 	Public Announcements. On the Effective Date, the Parties shall issue a press release
relating to this Agreement or activities conducted hereunder in the form attached hereto as
Exhibit D. A Party may issue any subsequent press releases or other written public
disclosures relating to this Agreement or activities conducted hereunder (each a “Proposed
Disclosure”) upon prior written approval of the other Party, such approval not to be
unreasonably withheld; provided, however, that each Party will use commercially reasonably
efforts to submit to the other Party a draft of such Proposed Disclosure for review and
comment by the other Party at least * prior to the date on which such Party would like to
release such Proposed Disclosure. No approval of the other Party shall be required if a
subsequent press release solely discloses information that has previously been approved.
Neither Party shall use the name, trademark, trade name or logo of the other Party or its
employees in any publicity or news release relating to this Agreement or its subject matter,
without the prior express written permission of the other Party. Neither Party shall disclose
the existence or terms of this Agreement except as provided in Sections 8.2 and 8.3.
	 
	8.6	 	No Implied Rights. Except as otherwise set forth in this Agreement, nothing herein shall be
construed as giving either Party any right, title, interest in or ownership of the
Confidential Information of the other Party. For the purposes of this Agreement, specific
information disclosed as part of Confidential Information shall not be deemed to be in the
public domain or in the prior possession of the Receiving Party merely because it is embraced
by more general information in the public domain or by more general information in the prior
possession of the Receiving Party.

 

			
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	9.	 	REPRESENTATIONS AND WARRANTIES.
	 
	9.1	 	Representations and Warranties of Avalon. Avalon, subject to this Article 9, hereby
represents, warrants, and covenants to MedImmune that, as of the Effective Date:

               (a) it is a corporation or entity duly organized and validly existing under the laws of
the state or other jurisdiction of its incorporation or formation;

               (b) the execution, delivery and performance of this Agreement by has been duly
authorized by all requisite corporate action and does not require any shareholder action or
approval;

               (c) it has the power, authority and right to execute and deliver this Agreement and to
execute the licenses and otherwise perform its obligations hereunder;

               (d) it shall at all times comply with all applicable material laws and regulations
relating to its activities under this Agreement;

               (e) it has no knowledge of any rights of any Third Parties that would be infringed by
the practice of the Avalon Patent Rights and/or Avalon Know-How in connection with
activities to be conducted hereunder;

               (f) it has the right to use the Avalon Chemical Library as contemplated in this
Agreement;

               (g) there are no claims, judgments or settlements against Avalon pending or to its
knowledge, threatened, seeking to invalidate the Avalon Patent Rights and/or Avalon
Know-How; and

               (h) there are no royalty payments owed by Avalon to Third Parties for the Avalon
Compound Patent Rights, Avalon Compound Know-How, Avalon Patent Rights and/or Avalon
Know-How.

	9.2	 	Representations and Warranties of MedImmune. MedImmune, subject to this Article 9, hereby
represents, warrants, and covenants to Avalon that, as of the Effective Date:

     (a) it is a corporation or entity duly organized and validly existing under the laws of
the state or other jurisdiction of its incorporation or formation;

     (b) the execution, delivery and performance of this Agreement by has been duly
authorized by all requisite corporate action and does not require any shareholder action or
approval;

 

			
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     (c) it has the power and authority to execute and deliver this Agreement and to execute
the licenses and otherwise perform its obligations hereunder;

     (d) it shall at all times comply with all applicable material laws and regulations
relating to its activities under this Agreement;

     (e) senior management of MedImmune has no knowledge of any rights of any Third Parties
that would be infringed or are being infringed by the use of the MedImmune Patent Rights,
the MedImmune Know-How and/or the MedImmune Antibodies in connection with the activities
contemplated to be conducted under this Agreement; and

     (f) it has no notice of any claims, judgments or settlements against MedImmune pending,
or to its knowledge, threatened, seeking to invalidate the MedImmune Technology.

	9.3	 	No Inconsistent Agreements. Neither Party has in effect and after the Effective Date neither
Party shall enter into any oral or written agreement or arrangement that would be inconsistent
with its obligations under this Agreement or violate any law or regulation of any court,
governmental body or administrative or other agency having jurisdiction over it.
	 
	9.4	 	Disclaimer. THE FOREGOING WARRANTIES OF EACH PARTY ARE IN LIEU OF ANY OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF NONINFRINGEMENT,
ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR ANY IMPLIED WARRANTIES OF FITNESS FOR A
PARTICULAR PURPOSE ALL OF WHICH ARE HEREBY SPECIFICALLY EXCLUDED AND DISCLAIMED.
	 
	9.5	 	Limitation of Damages. IN NO EVENT SHALL EITHER PARTY OR THEIR AFFILIATES BE LIABLE FOR
SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, CONSEQUENTIAL OR TREBLE DAMAGES, WHETHER BASED ON
CONTRACT, TORT, OR ANY OTHER LEGAL THEORY; PROVIDED, HOWEVER, THAT THIS LIMITATION SHALL NOT
LIMIT THE INDEMNIFICATION OBLIGATION OF SUCH PARTY UNDER THE PROVISIONS OF ARTICLE 11 FOR SUCH
DAMAGES CLAIMED BY A THIRD PARTY.
	 
	10.	 	TERM AND TERMINATION.
	 
	10.1	 	Term. The term of this Agreement will commence on the Effective Date and extend, unless this
Agreement is terminated earlier in accordance with this Article 10 or until the earlier of (i)
fifty (50) years or (ii) such time as MedImmune’s obligation to pay royalties with respect to
the sale of such Product in all countries expires in accordance with

 

			
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	 	 	Section 5.2.3 (the
“Term”). For the avoidance of doubt, the Parties acknowledge and agree that certain licenses
may survive the termination or expiration of this Agreement in accordance with the provisions
of Sections 10.4 and 10.5.
	 
	10.2	 	Expiration. If, at any time after the expiration of Stage III of the Research Program,
MedImmune has determined not to select a Clinical Candidate, this Agreement shall expire
effective as of the date that MedImmune provides written notice that no Clinical Candidate
will be selected; provided, however, that if one or more Options have been exercised in
accordance with Section 5.3, then the applicable provisions of this Agreement shall survive to
the extent necessary to give effect thereto. Subject to Section 10.4(d), in the event of
expiration of this Agreement pursuant to this Section 10.2, all licenses granted hereunder
will automatically expire, and expiration of this Agreement shall not relieve the Parties of
any obligation accruing prior to such expiration.
	 
	10.3	 	Termination.

10.3.1 Material Breach.

          (a) If either Party believes that the other Party (the “Breaching Party”) is in
material breach of this Agreement (including without limitation any material breach of the
representations or warranties made in Section 9.1 and Section 9.2 of this Agreement), then
the non-breaching Party may deliver notice to the Breaching Party specifying the material
breach. For all breaches other than a failure to make a payment, the allegedly Breaching
Party shall have * to either cure such breach or, if cure cannot be reasonably effected
within such * period, to deliver to the other Party within that period a plan for curing
such breach, which may or may not be accepted by such other Party in such other Party’s sole
discretion. Such a plan shall set forth a program for achieving cure as rapidly as
practicable. Following delivery of such plan, the Breaching Party shall use diligent
efforts to carry out the plan and cure the breach as promptly as practicable. For any
breach arising from a failure to make a payment, the allegedly Breaching Party shall have *
to cure such breach. Notwithstanding the foregoing, if MedImmune reasonably and in good
faith disputes whether a payment is due or the amount of such payment, MedImmune shall have
the right to pay to Avalon only the undisputed amount, and either Party shall have the right
to initiate dispute resolution under Article 13 to determine whether the amount in dispute
is payable. In such event, the disputed payment or amount thereof shall not be due until
there is a final determination as to the amount that is payable by MedImmune, and interest
shall be due on any amounts determined to have been payable to Avalon in accordance with the
provisions of Section 5.2.7.

          (b) An election of remedy by a Party for a material breach of this Agreement under this
Section 10.3 on one occasion shall not constitute a waiver as to any other remedy that may
be available to such Party under this Section 10.3 as to any material breach on another
occasion.

 

			
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10.3.2 Termination by MedImmune.

MedImmune shall have the right to terminate this Agreement in the entirety or with respect
to one or more countries in which MedImmune and/or its Affiliates is not then and shall not
thereafter, manufacture, have manufactured, market, have marketed, sell, have sold, import
or have imported any Product (provided that if MedImmune and/or its Affiliates are then
marketing or selling Product in such country, it shall have the right to sell off left over
inventory in accordance with its then-current practices and subject to the payment of
royalties to Avalon under Section 5.2.3, at the option of MedImmune and/or its Affiliates,
as the case may be), for any reason other than material breach by Avalon, upon * prior
written notice to Avalon, if such termination notice is provided to Avalon during the
Research Program, or (ii) upon * prior written notice to Avalon, if such termination notice
is provided to Avalon after the Research Program terminates (such notice, the “MedImmune
Termination Notice”). Upon any termination of this Agreement with respect to one or more
countries (and not in its entirety), the Territory shall thereafter exclude the countries to
which the MedImmune Termination Notice applies.

10.3.3 Termination for Insolvency.

          (a) If voluntary or involuntary proceedings by or against a Party are instituted in
bankruptcy under any insolvency law, or a receiver or custodian is appointed for such Party,
or proceedings are instituted by or against such Party, in each of the foregoing cases only
if it is for dissolution of such Party, which proceedings, if involuntary, shall not have
been dismissed within * after the date of filing, then this Agreement may be terminated by
the other Party.

          (b) All rights and licenses granted under this Agreement are, and shall be deemed to
be, for purposes of Section 365(n) of the United States Bankruptcy Code, licenses of rights
to “intellectual property” as defined under Section 101(56) of the United States Bankruptcy
Code. The Parties agree that in the event of the commencement of a bankruptcy proceeding by
or against one Party hereunder under the United States Bankruptcy Code, the other Party
shall be entitled to complete access to any such intellectual property, and all embodiments
of such intellectual property, pertaining to the rights granted in the licenses hereunder of
the Party by or against whom a bankruptcy proceeding has been commenced, subject, however,
to payment of the fees, milestone payments and royalties set forth in this Agreement through
the effective date of any termination hereunder.

	10.4	 	Effect of Termination or Expiration.

          (a) Product. In the event of termination of this Agreement other than under
Section 10.3.1 for Avalon’s uncured material breach, MedImmune shall have * to complete the
manufacture of any Product and * to sell or otherwise dispose of any Products in stock or in
the course of manufacture at the time of termination, all subject,

 

			
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however, to payments of royalty and accounting as provided herein, even if such royalty
obligations arise from transactions subsequent to the effective date of termination, and
termination of this Agreement shall not relieve the Parties of any obligation accruing prior
to such termination.

          (b) If MedImmune terminates this Agreement under Section 10.3.1(a) for Avalon’s uncured
material breach, at MedImmune’s option and upon written notice to Avalon, MedImmune’s
license pursuant to Section 2.1 shall become a perpetual license; provided,
however, MedImmune shall continue to fulfill all of MedImmune’s financial
obligations hereunder, excluding milestone but including royalty obligations as specified
herein. MedImmune may reduce such payment and/or royalty obligations by the amount of
monetary damage suffered by MedImmune as a direct result of Avalon’s breach of this
Agreement. Avalon shall, as soon as practicable after such termination, return or cause to
be returned to MedImmune all Information in tangible form, and all substances or
compositions delivered or provided by MedImmune, as well as any other material provided by
MedImmune in any medium.

          (c) If Avalon terminates this Agreement under Section 10.3.1(a) for MedImmune’s uncured
material breach, at Avalon’s option and upon written notice to MedImmune, all rights and
licenses granted in this Agreement to MedImmune shall automatically expire and expiration of
this Agreement shall not relieve the Parties of any obligations accruing prior to such
expiration.

          (d) If MedImmune or Avalon terminates this Agreement in its entirety for any reason
(other than MedImmune’s uncured material breach under Section 10.3.1(a)) or upon the
expiration of this Agreement, MedImmune will retain a perpetual, irrevocable exclusive
license (exclusive even as to Avalon) to the (i) * for any purpose for use in the Field;
(ii) * for any purpose for use in the Field; and (iii) * for use by MedImmune in the Field
so long as such use of the * is related to the pathway of the Target and the therapeutic
applications thereof, except for * for transcriptional-based screening to identify any
compound. In the event that MedImmune re-initiates development and commercialization of
Products that are part of the Avalon Compound Know-How (excluding Target Biomarkers) or
Avalon Compound Patent Rights (excluding Target Biomarkers), then all of the obligations in
Section 5.2.2 — 5.2.8, Article 6, Article 11 and Article 13 shall be effective.

          (e) Sublicenses. In the event that this Agreement is terminated by Avalon
under Section 10.3.1(a), Avalon agrees to grant to existing sublicensees designated by
MedImmune (other than an Affiliate of MedImmune) direct licenses with Avalon, which license
shall be of the same scope sublicensed to such sublicensee, substituting the name of such
sublicensee for MedImmune, provided that such sublicensee (i) agrees to be bound to Avalon
under the terms and conditions of this Agreement and (ii) the sublicensee is not in breach
of its sublicense agreement with MedImmune.

 

			
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          (f) Accrued Rights and Obligations. Except for termination for breach of
diligence obligations under Article 12 for which a sole remedy is provided therein and any
dispute subject to dispute resolution under Article 13, termination or expiration of this
Agreement shall not (i) release either Party from any liability which, at the time of such
termination or expiration, has already accrued or which is attributable to a period prior to
such termination or expiration or (ii) preclude either Party from pursuing any rights and
remedies it may have hereunder or at law or in equity with respect to any breach of, or
default under, this Agreement. Without limiting the generality of the foregoing, if
MedImmune terminates this Agreement during the Research Program other than for Avalon’s
uncured material breach under Section 10.3.1, MedImmune shall be liable to Avalon for all
reasonable, non-cancellable costs and expenses directly related to the Research Program. In
addition, the Parties understand and agree that monetary damages may not be a sufficient
remedy for any breach of this Agreement and that the non-breaching Party may be entitled to
injunctive relief as a partial remedy for any such breach, except for termination for breach
of diligence obligations under Article 12 for which a sole remedy is provided therein and
any dispute subject to dispute resolution under Article 13.

	10.5	 	Survival. Except as expressly provided herein, the following provisions shall survive
expiration or termination of this Agreement: Article 6, Article 7, Article 8, Article 9,
Article 10, Article 11, Article 13 and Article 14, and Section 2.2(b), Section 2.1 (in
accordance with Section 10.4) and Section 5.2.
	 
	11.	 	INDEMNIFICATION AND INSURANCE.
	 
	11.1	 	Indemnification by MedImmune. MedImmune shall defend, indemnify and hold harmless Avalon and
its Affiliates and their respective directors, officers, employees, shareholders and agents
(each, an “Avalon Indemnified Party”) from and against any and all Third Party claims, suits
or demands for liabilities, damages, losses, costs and expenses (including the reasonable fees
of attorneys and other professionals) arising out of or resulting from (i) the development,
manufacture, use, distribution or sale of any Product by MedImmune, its Affiliates,
distributors, co-marketers or sublicensees, their agents or any person or entity that prepares
or manufactures Product for or on behalf of any of the foregoing or any person or entity who
receives or obtains Product from any source; (ii) Development and Commercialization Program
work performed by or on behalf of MedImmune other than by Avalon or a Third Party mutually
agreed upon by Avalon and MedImmune; (iii) the performance by MedImmune of any of MedImmune’s
obligations under the Research Program and/or (iv) any MedImmune representation or warranty
set forth herein being untrue in any material respect when made, or the failure of MedImmune
to perform any covenant hereunder, except in each case of (i) — (iii) above, to the extent
caused by the negligence or willful misconduct of Avalon or any Avalon Indemnified Party.

 

			
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	11.2	 	Indemnification by Avalon. Avalon shall defend, indemnify and hold harmless MedImmune, and
its Affiliates and their respective directors, officers, employees, shareholders, sublicensees
and agents (each, a “MedImmune Indemnified Party”) from and against any and all Third Party
claims, suits or demands for liabilities, damages, losses, costs and expenses (including the
reasonable fees of attorneys and other professionals) arising out of or resulting from (i) the
performance of Avalon’s obligations under the Research Program, or (ii) any Avalon
representation or warranty set forth herein being untrue in any material respect when made,
including, but not limited to, Third Party claims of infringement, or the failure of Avalon to
perform any covenant hereunder, except in the case of (i) above, to the extent caused by the
negligence or willful misconduct of MedImmune or any MedImmune Indemnified Party.
	 
	11.3	 	Procedure. Each Party will promptly notify the other in the event it becomes aware of a
claim for which indemnification may be sought hereunder. In case any proceeding (including
any governmental investigation) shall be instituted involving any Party in respect of which
indemnity may be sought pursuant to this Article 11, such Party (the “Indemnified Party”)
shall promptly notify the other Party (the “Indemnifying Party”) in writing and the
Indemnifying Party and Indemnified Party shall meet to discuss how to respond to any claims
that are the subject matter of such proceeding. The Indemnifying Party shall retain counsel
reasonably satisfactory to the Indemnified Party and shall pay the fees and expenses of such
counsel related to such proceeding. The Indemnifying Party shall have the sole right to
control the defense of any such claim or action. In any such proceeding, the Indemnified
Party shall have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of the Indemnified Party unless the Indemnifying Party and the
Indemnified Party shall have mutually agree in writing to the retention of such counsel. The
Indemnifying Party shall not be liable for any settlement of any proceeding effected by the
Indemnified Party without its written consent, but if settled with such consent or if there be
a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified
Party from and against any loss or liability by reason of such settlement or judgment. The
Indemnifying Party may settle any such claim, demand, action or other proceeding or otherwise
consent to an adverse judgment (a) with prior written notice to the Indemnified Party but
without the consent of the Indemnified Party where the only liability is the payment of money
and the Indemnifying Party makes such payment or (b) with the prior written consent of the
Indemnified Party, which will not be unreasonably withheld or delayed.
	 
	11.4	 	Insurance. Prior to the first sale or use in humans, whichever is earlier, of a Product,
MedImmune shall maintain and carry in full force and effect product liability insurance
(including contractual liability coverage on MedImmune’s indemnification obligations under
this Agreement), which shall provide coverage with minimum limits of * per occurrence and * in
the aggregate. Such insurance shall be maintained with an insurance company or companies
having an A.M. Best rating of “A-” or better. MedImmune shall promptly provide Avalon with
Certificates of Insurance evidencing the same upon the written request of Avalon. MedImmune
may satisfy the insurance requirements set forth in this Agreement under MedImmune’s existing
product liability policies; MedImmune

 

			
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	 	 	will not be required to procure a new or separate insurance policy for the purposes of this
Agreement. MedImmune reserves the right to self-insure with respect to all or
part of its obligations under this Agreement.
	 
	12.	 	DILIGENCE OBLIGATIONS.
	 
	12.1	 	Annual Development and Commercialization Program Plan. Upon initiation of a Development and
Commercialization Program, MedImmune shall submit to Avalon a Development and
Commercialization Program plan setting forth in reasonable detail the activities to be pursued
in that Development and Commercialization Program during the first twelve (12) months.
Thereafter, annual updates of the Development and Commercialization Program plan for each
Contract Year in which there is expected to be Development and Commercialization Program
activity shall be submitted to Avalon by no later than three months prior to the end of the
previous Contract Year. MedImmune shall have sole discretion for making all decisions relating
to the Development and Commercialization of Products, provided that actions or omissions
undertaken by MedImmune in its sole discretion shall not relieve it of its obligations under
this Agreement, including its obligations to use Commercially Reasonable Efforts in connection
with the Development and Commercialization Program as set forth in Section 12.3.
	 
	 	 	12.2. Development and Commercialization Program Reports. During performance of any Development
and Commercialization Program, MedImmune shall submit to Avalon semi-annual reports setting
forth in reasonable detail the past half calendar year’s activities, and the prospective
activities for the next half calendar year.
	 
	12.3	 	MedImmune’s Commercially Reasonable Efforts.

12.3.1 During the Term, subject to Avalon’s performance of its diligence obligations set
forth in Section 12.4 and provided that MedImmune has not exercised its right to terminate
this Agreement under Article 10, MedImmune shall use Commercially Reasonable Efforts to
select one or more Clinical Candidates, initiate, conduct and monitor Development and
Commercialization Programs for such Clinical Candidates, and commercialize Products
developed from such Development and Commercialization Programs.

12.3.2 If in any Contract Year, MedImmune or its Affiliate and/or a Sublicensee and/or a
collaborator of MedImmune (including work of Avalon under the Research Program), alone or
together, has achieved any one of the following with respect to Product, and MedImmune in
such Contract Year has not discontinued Product development, then MedImmune shall be deemed
to have complied with MedImmune’s obligations under Section 12.3.1 for such Contract Year:

          (a) has expended *;

          (b) *;

 

			
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          (c) *;

          (d) is conducting a Phase I Clinical Trial with respect to Product;

          (e) is conducting a Phase II Clinical Trial with respect to Product;

          (f) is conducting a Phase III Clinical Trial with respect to Product;

          (g) has prepared documents for filing a NDA or comparable application with the FDA with
respect to Product;

          (h) has filed a NDA or comparable application with the FDA for Product;

          (i) is pursuing a filed NDA or comparable application with the FDA for Product;

          (j) has received approval of a NDA or comparable application from the FDA for Product;
or

          (k) a Product is launched or is being sold in the United States.

12.3.3 Subject to Section 12.3.4, in the event that MedImmune fails to comply with the
obligations of Section 12.3.1 with respect to any Contract Year and, in addition, has not
achieved any of the milestones set forth in Sections 12.3.2(a) through 12.3.2(k) during such
Contract Year, Avalon shall have the right, as the sole and exclusive remedy for MedImmune’s
failure to comply therewith, to terminate this Agreement pursuant to Section 10.3.1(a) by
written notice to MedImmune within * after the end of the applicable Contract Year, unless
MedImmune cures such failure prior to the expiration of * after such notice. If MedImmune
provides to Avalon a notice that MedImmune has decided to discontinue Product development,
then MedImmune shall be deemed to have terminated this Agreement pursuant to Section 10.3.2.

12.3.4 If MedImmune receives a notice under Section 12.3.3, MedImmune shall have the right
to contest such notice by requesting arbitration under Section 13.2, and if MedImmune
requests such arbitration, this Agreement shall be terminated pursuant to Section 12.3.3
only if in such arbitration there is a final determination that MedImmune has not met
MedImmune’s obligation under Section 12.3.1 in the applicable Contract Year and, in
addition, in such Contract Year none of the events of Section 12.3.2(a) through 12.3.2(k)
has occurred.

12.3.5 It is expressly understood that MedImmune will not be obligated *. In the event that
MedImmune fails to meet its obligations under Section 12.3 in Europe or Japan, then Avalon
shall have the right to terminate MedImmune’s licenses with respect to such Product in
Europe or Japan as the case may be by written notice to MedImmune in accordance with Section
10.3.

 

			
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	12.4	 	Avalon’s Commercially Reasonable Efforts. During the Term, Avalon agrees to use
Commercially Reasonable Efforts to perform research in accordance with the Research Program.
	 
	13.	 	DISPUTE RESOLUTION.
	 
	13.1	 	Good Faith Negotiations. In the event of any dispute, disagreement or claim between the
Parties as to the interpretation of any provision of this Agreement or the performance of
obligations hereunder other than Management Committee disputes under Section 3.2, the matter,
upon written request of either Party, shall first be referred to the Chief Executive Officer
of Avalon, or such other person holding a similar position designated by Avalon from time to
time, and the Chief Executive Officer of MedImmune, or such other person holding a similar
position designated by MedImmune from time to time, for resolution. These individuals shall,
within * of when the matter is referred to them, attempt in good faith to resolve the dispute.
These individuals may obtain the advice of other employees as they deem necessary or
advisable in order to make the decision.
	 
	13.2	 	Arbitration. Any dispute, disagreement or claim (other than a dispute that involves the
validity, scope or enforceability of patents that arise under the patent laws of a country or
a dispute under Article 3) that cannot be resolved by the respective officers of the Parties
under Section 13.1 above within * after its submission, shall be settled by binding
arbitration held in Washington, DC in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, except that (a) there shall be three U.S.-licensed attorneys
acting as arbitrators, (b) the arbitration proceedings shall be subject to the confidentiality
provisions of Article 8 of this Agreement and (c) the Parties will bear their own costs in
preparing for the arbitration. Whenever a Party decides to institute arbitration
proceedings, it shall give written notice to that effect to the other. The demand for
arbitration may be filed by either Party within a reasonable time after the controversy or
claim has arisen; provided, however, in no event shall a demand for arbitration be made after
the date when institution of a legal or equitable proceeding based upon such claim, dispute or
other matter in question would be barred by the applicable statute of limitations or the
provisions of this Agreement. Each Party shall select one arbitrator. The Party initiating
recourse to arbitration shall include in its notice of arbitration its appointment of an
arbitrator, and the other Party shall select the second arbitrator within * of the date it
receives such notice. The two arbitrators selected by the Parties shall select the third
arbitrator. At least one of the arbitrators shall be a licensed attorney who has represented
pharmaceutical companies for at least ten (10) years and is knowledgeable concerning the type
of subject matter at issue in the dispute. Discovery in any arbitration proceeding under this
Section 13.2 shall be permitted with respect to the performance by the Parties of their
obligations under this Agreement and such other matters as the arbitrators may determine (it
being the intent of the Parties that full discovery occur with respect to the salient facts).
The arbitrators shall render a decision within * of the completion of the arbitration. The
arbitrators shall award costs and expenses, including reasonable attorneys’ fees, to the Party
in whose favor the arbitral

 

			
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	 	 	award has been granted. The award of the arbitrators shall be in writing and shall be
binding on the Parties, and judgment upon the award rendered by the arbitrators may be
entered in any federal court having jurisdiction. Any decision or award made by the
arbitrators shall be in accordance with the terms and conditions of this Agreement and shall
not be inconsistent with the rights and obligations of the Parties as set forth in this
Agreement. Nothing in this Agreement bars the right of either Party to obtain preliminary
or permanent injunctive relief against threatened conduct that will cause it loss or damage,
in accordance with the rules for obtaining injunctive relief in any jurisdiction, including
the applicable rules for obtaining restraining orders and preliminary injunctions. The
Parties hereby waive their right to a jury trial in connection with any matter submitted for
resolution by arbitration hereunder, except as provided in the last sentence hereof.
Notwithstanding the foregoing, disputes regarding the validity, inventorship, scope or
enforceability of patents shall be submitted to a court of competent jurisdiction in the
country where such patent has issued or such patent application is filed.
	 
	14.	 	MISCELLANEOUS.
	 
	14.1	 	Assignment. Neither this Agreement nor any interest hereunder shall be assignable by either
Party without the prior written consent of the other Party, except for assignment in
connection with a Change of Control of a Party or in connection with a transfer by MedImmune
of all or substantially all of the assets to which this Agreement is related. This Agreement
shall be binding upon the successors and permitted assigns of the Parties and the name of a
Party appearing herein shall be deemed to include the names of such Party’s successors and
permitted assigns to the extent necessary to carry out the intent of this Agreement. Any
assignment not in accordance with this Section 14.1 shall be void.
	 
	14.2	 	Further Actions. Each Party agrees to execute, acknowledge and deliver such further
instruments, and to do all such other acts, as may be necessary or reasonably appropriate in
order to carry out the purposes and intent of the Agreement or to better assure and confirm
unto such other Party its rights and remedies under this Agreement.
	 
	14.3	 	Force Majeure. Neither Party shall be liable to the other for delay or failure in the
performance of the obligations on its part contained in this Agreement if and to the extent
that such failure or delay is due to circumstances beyond its control which it could not have
avoided by the exercise of reasonable diligence. It shall notify the other Party promptly
should such circumstances arise, giving an indication of the likely extent and duration
thereof, and shall use all commercially reasonable efforts to resume performance of its
obligations as soon as practicable, provided, however, that neither Party shall be
required to settle any labor dispute or disturbance. Actions taken by a Party to resume
performance of its obligations with respect to the Research Program shall be taken in
consultation with the MC.
	 
	14.4	 	Correspondence and Notices. Correspondence, reports, documentation, notices and any other
communication in writing between the Parties pursuant to this Agreement shall be delivered by
hand, sent by registered mail, return receipt requested, postage prepaid or

 

			
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	 	 	sent by facsimile transmission (receipt verified) to the employee or representative of the
other Party who is designated by such other Party to receive such written communication.
Notices shall be deemed effective given and received upon personal delivery, the fifth day
following mailing sent by registered or certified mail, or upon transmission of facsimile
(with telephonic notice).
	 
	 	 	All correspondence to Avalon shall be addressed as follows:

Avalon Pharmaceuticals

20358 Seneca Meadows Parkway

Germantown, MD 20876

Attn: Chief Executive Officer

Telephone: (301) 556-9810

Fax: (301) 556-9910

With a copy to:

Avalon Pharmaceuticals

20358 Seneca Meadows Parkway

Germantown, MD 20876

Attn: General Counsel

Telephone: (301) 556-9812

Fax: (301) 556-9910

	 	 	All correspondence to MedImmune shall be addressed as follows:

MedImmune, Inc.

One MedImmune Way

Gaithersburg, MD 20878

Attn: Senior Vice President, Corporate Development

Telephone: (301) 398-4698

Fax: (301) 398-9698

With a copy to the same address: Legal Affairs

Attn: General Counsel

Telephone: (301) 398-4625

Fax: (301) 398-9625

	14.5	 	Amendment. No amendment, modification or supplement of any provision of this Agreement shall
be valid or effective unless made in writing and signed by a duly authorized officer of each
Party.
	 
	14.6	 	Waiver. No provision of the Agreement shall be waived by any act, omission or knowledge of a
Party or its agents or employees except by an instrument in writing expressly waiving such
provision and signed by a duly authorized officer of the waiving

 

			
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	 	 	Party. Such waiver shall not be deemed a waiver of any other right hereunder or of any
other breach or failure by a Party whether of similar nature or
otherwise.

	14.7	 	Severability. Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall be, as to such jurisdiction and to the extent practicable, modified so as
to make it valid, legal and enforceable and to maintain as nearly as practicable the intent of
the Parties without invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
	 
	14.8	 	Descriptive Headings; Interpretation. The section headings contained in this Agreement are
for convenience of reference only, do not form a part of this Agreement and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the context may require,
any pronoun shall include the corresponding masculine, feminine and neuter forms. The words
“include,” “includes” and “including” shall be deemed to be followed by the phrase “but not
limited to.” All references herein to Articles, Sections and Exhibits shall be deemed
references to Articles and Sections of, and Exhibits to, this Agreement unless the context
shall otherwise require. All Exhibits attached to this Agreement shall be deemed incorporated
herein by reference as if fully set forth herein. Words such as “herein,” “hereof,” “hereto,”
“hereby” and “hereunder” refer to this Agreement and to the Exhibits, taken as a whole.
Except as otherwise expressly provided herein: any reference in this Agreement to any law
shall include corresponding provisions of any successor law and any regulations and rules
promulgated pursuant to such law or such successor law.
	 
	14.9	 	Governing Law. This Agreement shall be governed by and interpreted in accordance with the
substantive laws of the State of New York, without regard to conflict of law principles
thereof.
	 
	14.10	 	Entire Agreement. This Agreement and the Exhibits thereto, constitute the full and entire
understanding and agreement among the Parties with regard to the subject matter hereof and no
Party shall be liable or bound to any other Party in any manner by any representations,
warranties, covenants, or agreements except as specifically set forth herein or therein.
Nothing in this Agreement, express or implied, is intended to confer upon any Party, other
than the Parties hereto and their respective successors and assigns, any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as expressly provided
herein.
	 
	14.11	 	Independent Contractors. It is expressly agreed that the Parties are independent
contractors under this Agreement. Nothing herein contained shall be deemed to create an
employment, agency, joint venture or partnership relationship between the Parties hereto or
any of their agents or employees, or any other legal arrangement that would impose liability
upon one Party for the act or failure to act of the other Party. Neither Party shall have any
express or implied power to enter into any contracts or commitments or to incur any
liabilities in the name of, or on behalf of, the other Party, or to bind the other Party in
any respect whatsoever.

 

			
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	14.12	 	Debarment. Each Party agrees that it will not use, in any capacity, in connection with any
of its obligations to be performed under this Agreement any individual who has been debarred
under the FD&C Act or the Generic Drug Enforcement Act.
	 
	14.13	 	Counterparts. This Agreement may be executed in any number of counterparts, by facsimile or
otherwise, each of which need not contain the signature of more than one Party but all such
counterparts taken together shall constitute one and the same agreement and shall be deemed an
original.
	 
	14.14	 	Cumulative Remedies. Except as set forth in Section 12.3.3, no remedy referred to in this
Agreement is intended to be exclusive, but each shall be cumulative and in addition to any
other remedy referred to in this Agreement or otherwise available under law.
	 
	14.15	 	Waiver of Rule of Construction. Each Party has had the opportunity to consult with counsel
in connection with the review, drafting and negotiation of this Agreement. Accordingly, the
rule of construction that any ambiguity in this Agreement shall be construed against the
drafting Party shall not apply.

[Remainder of page intentionally left blank]

 
 

			
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IN WITNESS WHEREOF, duly authorized representatives of the Parties have duly executed

this Agreement to be effective as of the Effective Date.

	 	 	 	 	 	 	 
	Avalon Pharmaceuticals, Inc.	 	MedImmune, Inc.
	 
	 	 	 	 	 	 
	By

	 	/s/
	 	By
	 	/s/
	 

	 	 
	 	 	 	 
	Name: Kenneth C. Carter	 	Name: Edward T. Mathers
	Title: President and CEO	 	Title: SVP, Corporate Development

 

			
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EXHIBIT A – RESEARCH PROGRAM

	A.1.	 	General. The purpose of the Research Program is to apply Avalon Technology to the goal of
discovering and optimizing Small Molecules that can block the activity of the *. In addition,
the Research Program will apply Avalon Technology to the goal of defining Target Biomarkers
that can characterize the activity of MedImmune Antibodies or other pharmaceutical agents,
which block *.
	 
	 	 	The Research Program shall consist of three stages that are characterized by specific
research activities. During Stage I, Avalon will conduct METS profiling *. During Stage
II, Avalon will conduct HITS screening of the Avalon Chemical Library on * in order to
identify Compound Hits that produce the desired response profile across the gene Signature
Set. Such Compound Hits will be organized into Compound Families. Avalon and MedImmune
shall further characterize Compound Hits and/or Compound Families in relevant secondary
assays, and Avalon and MedImmune shall select Lead Compounds and/or Compound Families to be
advanced into Stage III. During Stage III, Avalon and MedImmune will perform Lead Compound
Optimization on Lead Compounds with the goal of defining and selecting Clinical Candidates.
	 
	A.2	 	Stage I
	 
	 	 	A.2.1 Collaborative Duties. Within 30 days of execution of this Agreement, the
Project Team shall meet and identify the * and * for initiation of Stage I of the Research
Program. The Project Team may identify further * to be used during Stage I while Stage I is
being conducted. *
	 
	 	 	At this time, we anticipate profiling treatments of at least one target cell line with the
following kinds of reagents in Stage
I:
         *
	 
	 	 	Initially, target cells will be treated individually with each of these reagents and
profiled by METS analysis. This will establish baseline expression profiles for each of
these reagents treated in isolation. *
	 
	 	 	A.2.2 MedImmune Duties. Within thirty (30) days after the first meeting of the
Project Team, MedImmune shall provide any * to Avalon, along with any MedImmune Know-How
necessary for Avalon to perform the Stage I research. MedImmune shall also provide to
Avalon samples of any Reference Compounds that are in its possession, if a decision is made
by the Project Team to pursue profiling of such agents.
	 
	 	 	A.2.3 Avalon Duties. Upon receipt of the *, MedImmune Know-How and Reference
Compounds (if any), Avalon will treat the Reference and MedImmune Cells with the *

 

			
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	 	 	and perform METS profiling of said treatments. * Avalon will conduct all relevant data
analyses (including the use of bioinformatics and other analytical tools) required to
establish * gene Signature Sets associated with blocking the activity of *.
	 
	A.3	 	Stage II
	 
	 	 	A.3.1. Collaborative Duties. The MC will review the data and recommendations from
Avalon concerning the pilot screen of approximately * compounds selected from the Avalon
Chemical Library (see below). At its discretion, based upon the analysis of screening data
from the pilot screen, the MC may recommend further refinement of a gene Signature Set prior
to the screening of the remaining compounds * in the Avalon Chemical Library. If the data
from the pilot screen appear satisfactory to the MC, then the MC will recommend the
screening of the remaining compounds in the Avalon Chemical Library.
	 
	 	 	A.3.2 Avalon Duties.
	 
	 	 	(a) Avalon will transfer and validate the relevant gene Signature Sets obtained from Stage I
onto the HITS quantitative polymerase chain reaction platform. Avalon will then perform a
pilot screen against a target cell used in Stage I. In the pilot screen, Avalon will test
approximately * compounds selected from the Avalon Chemical Library. Data from the pilot
screen will be analyzed by Avalon to evaluate the performance of the screen and the
suitability of the selected gene Signature Sets. Following the pilot screen and upon
approval by the MC, the remaining compounds in the Avalon Chemical Library (approximately *
compounds) will be screened and Compound Hits will be identified by Avalon. Although Avalon
estimates that approximately * Compounds from the Avalon Chemical Library may induce a gene
signature similar enough to the Signature Sets obtained from Stage I to warrant further
analysis, Avalon makes no warranty or representation as to how many, if any, Compounds will
be identified pursuant to this Section A.3.2(a).
	 
	 	 	(b) Avalon will re-screen any Compound Hits identified in Section A.3.2(a) at least once
using the same HITS assay employed in Section A.3.2(a), in order to confirm the activity
originally identified in the primary HITS screen. Avalon estimates, but does not warrant or
represent, that approximately *.
	 
	 	 	(c) Avalon will group any Compound Hits identified by the HITS assays of Sections A.3.2(a)
and A.3.2(b) into Compound Families based on similarities in function and chemical scaffold.
	 
	 	 	(d) Avalon will *.
	 
	 	 	(e) Avalon shall choose representative, confirmed Compound Hits from each Compound Family
and subject such Compound Hits to METS profiling, to generate

 

			
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	 	 	global gene expression profiles for each confirmed Compound Hit Family. The criteria used
to select these Compounds from the Compound Families shall be determined by Avalon and shall
include considerations of expected toxicity, expected pharmacokinetics, solubility and
ability to easily modify the chemical structure.

	 	 	A.3.3 MedImmune Duties: MedImmune will recommend relevant secondary assays (non-METS
assay) for the characterization of hits identified from screening during Stage II.
MedImmune will conduct testing of compound hits in relevant (non-METS) secondary assays.
When MedImmune conducts such testing, Avalon will transfer compound to MedImmune without any
information on chemical structure and MedImmune will not determine or have any Third Party
determine the structures of the compounds provided. Alternately, MedImmune will transfer
MedImmune Know-How for the performance of such assays to Avalon, provided that resources and
FTE’s to conduct such assays are available at Avalon. In such cases, MedImmune will pay for
the performance of such assays at Avalon. MedImmune shall participate in the selection of
Lead Compounds for Lead Optimization and recommend such Lead Compounds to the MedImmune
Executive Committee for approval. The MedImmune Executive Committee shall review such
recommendations and approve the initiation of Stage III, in its sole discretion.
	 
	A.4	 	Stage III
	 
	 	 	A.4.1 Collaborative Duties. For each Compound Family selected by MedImmune under
Section A.3.3, some or all of the Compound Hits within that Compound Family shall be
designated Lead Compounds and subjected to Lead Compound Optimization. The MC shall review
progress of Lead Compound Optimization and shall ultimately make the decision on selection
of Clinical Candidates.
	 
	 	 	A.4.2 Avalon Duties.
	 
	 	 	Avalon shall use standard medicinal and combinatorial chemistry to synthesize compound
Analogs during Lead Compound Optimization. Throughout the optimization process, Avalon
shall employ T-SAR and METS profiling of Lead Compounds and Lead Compound Analogs to monitor
and maintain activity that mimics the Signature Set generated in Stage I. The METS
profiling will also be used to monitor global gene activity and identify subgroups of
Analogs based upon changes in gene expression. Throughout the optimization process, Avalon
shall also use RACETraCK to rapidly address in vivo activity of Lead Compounds or Compound
Analogs, and identify those Lead Compounds or Lead Compound Analogs with the best activity
profile. It is anticipated that MedImmune will conduct animal studies and will provide the
necessary cells and/or tissues from such studies to Avalon for the isolation of RNA for use
in a RACETraCK assessment; however, only Avalon shall perform the actual RACETraCK
assessment of that RNA.

 

			
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	 	 	Any Compound within a Compound Family undergoing optimization under this Section A.4,
which is discovered to not inhibit the Target or have a modulating activity in the Target
pathway shall no longer be considered part of the Avalon Technology, and shall no longer be
exclusively licensed to MedImmune pursuant to Section 2.1(a).
	 
	 	 	A.4.3 MedImmune Duties. MedImmune shall be responsible for * of Compounds and
Analogs generated from screening or during Lead Compound Optimization. RACETraCK profiling
and analysis of any cells or tissues isolated from such animal models will be performed by
Avalon. MedImmune shall designate at least *, or present good reasons to the MC why no
Clinical Candidate has been selected. If MedImmune selects a Clinical Candidate, then it
must use Commercially Reasonable Efforts to initiate a Development and Commercialization
Program and commercialize a Product.

[Remainder of page intentionally left blank]

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

-46-

 

Exhibit B

Program Budget

*

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

-47-

 

Exhibit C

Certain Avalon Patent Rights

	1.	 	CERTAIN AVALON PATENT RIGHTS

*

Internal Use Notes:

*

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

-48-

 

Exhibit D

Form of Press Release

MEDIMMUNE AND AVALON PHARMACEUTICALS ANNOUNCE

COLLABORATION TO DISCOVER SMALL MOLECULE THERAPEUTIC DRUGS

FOR INFLAMMATORY DISEASES

GAITHERSBURG, MD and GERMANTOWN, MD, June XX, 2005 - MedImmune, Inc. (Nasdaq: MEDI) and Avalon
Pharmaceuticals, Inc. today announced a collaboration to discover and develop small molecule
therapeutic compounds in the area of inflammatory disease. Avalon will use its
AvalonRxTM drug discovery engine to identify lead compounds. MedImmune will be
responsible for preclinical and clinical testing of any resulting product candidates, as well as
all future development and sales and marketing activities.

Under the terms of the agreement, Avalon will receive an upfront payment, research and development
support, milestone payments and royalties on any future marketed products. MedImmune also has the
option to initiate two additional small molecule drug discovery collaborations with Avalon under
similar terms.

“This collaboration with Avalon expands the breadth of our research to include small molecules as
potential therapies for various inflammatory diseases,” stated Edward T. Mathers, MedImmune’s
senior vice president of corporate development. “We look forward to investigating Avalon’s
proprietary drug discovery technology with the hope that our combined efforts will lead to
developing new treatment options for patients suffering from debilitating disease.”

“We are excited to be MedImmune’s first partner in the discovery and optimization of small molecule
therapeutic compounds,” stated Ken Carter, Avalon’s chief executive officer. “It is also
significant that this is our first major program with our AvalonRx drug discovery platform in a
therapeutic area beyond our internal cancer focus.”

About MedImmune

MedImmune strives to provide better medicines to patients, new medical options for physicians,
rewarding careers to employees, and increased value to shareholders. Dedicated to advancing science
and medicine to help people live better lives, the company is focused on the areas of infectious
diseases, cancer and inflammatory diseases. With approximately 2,000 employees worldwide, MedImmune
is headquartered in Maryland. For more information, visit the company’s website at
http://www.medimmune.com.

About Avalon

Avalon Pharmaceuticals is a biopharmaceutical company focused on the discovery and development of
small molecule therapeutics for the treatment of cancer. Avalon seeks to

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

-49-

 

discover and develop novel therapeutics through the use of a comprehensive, innovative and
proprietary suite of technologies based upon large-scale gene expression analysis which it calls
AvalonRxTM. Avalon Pharmaceuticals was established in 1999 and is headquartered in Germantown,
Maryland.

This announcement contains, in addition to historical information, certain forward-looking
statements that involve risks and uncertainties, in particular, related to the research and
development of future small molecule products. Such statements reflect the current views of
MedImmune and/or Avalon management and are based on certain assumptions. Actual results could
differ materially from those currently anticipated as a result of a number of factors, including
risks and uncertainties discussed in MedImmune’s filings with the U.S. Securities and Exchange
Commission. There can be no assurance that such development efforts will succeed, that the products
will receive required regulatory clearance or, even if such regulatory clearance is received, that
the subsequent products will ultimately achieve commercial success.

###

 

			
	*	 	The asterisk denotes the confidential portions of this document that have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended.

-50-exv10w45

 

EXHIBIT 10.45

AVALON PHARMACEUTICALS, INC.

AMENDED AND RESTATED LINE OF CREDIT AGREEMENT

     This
Amended and Restated Line of Credit Agreement (this
“Agreement”) is made and
entered into as of September 8, 2005 (the “Effective Date”) by and among Avalon
pharmaceuticals, inc., a Delaware corporation (the “Company”), and the individuals and
entities listed on the Schedule of Lenders attached hereto as Exhibit A (individually, a “Lender”
and collectively the “Lenders”), and amends and restates that certain Line of Credit Agreement,
made and entered into as of August 30, 2005 (the “Original Agreement”) in accordance with Section
8.8 of the Original Agreement.

Recitals

     Whereas, no borrowings have been made under the Original Agreement and the conditions
to the making of advances thereunder not yet having been met, the Company and the Majority Lenders
desire to amend and restate the Original Agreement;

     Whereas, the Company has offered each of the individuals and entities listed on
Exhibit B attached hereto the opportunity to enter into the Original Agreement and this Agreement
as a Lender;

     Whereas, of the individuals and entities listed on Exhibit B, each of individuals and
entities listed on Exhibit A desires to accept the Company’s offer to enter into the Original
Agreement and this Agreement as a Lender hereunder; and

     Whereas, in exchange for a commitment from each Lender to loan funds to the Company
on the terms and conditions set forth herein, the Company will issue a subordinated promissory note
to each Lender.

Agreement

     Now Therefore, the parties to this Agreement, for good and valuable consideration,
the receipt and sufficiency of which is acknowledged and agreed, hereby agree as follows:

1. Loan Amount; Issuance of Notes; Acknowledgment of Commitment.

     1.1 Loan Amount; Issuance of Notes. Subject to the terms of this Agreement, each Lender
agrees, severally and not jointly, to lend to the Company up to the maximum amount set forth below
such Lender’s signature on the Lender’s signature page hereto. Each Lender’s loan commitment
amount, as may be adjusted pursuant to Section 1.3 hereof, shall be reflected under the heading
“Maximum Advance under Note” opposite such Lender’s name on Exhibit A (the “Loan Amount”). To
evidence the Company’s obligation to repay such advances, the Company shall issue to each Lender a
Subordinated Promissory Note for such Loan Amount in the form attached hereto as Exhibit C (the
“Note”).

     1.2 Intentionally Omitted.

     1.3 Acknowledgment of Commitment. Each Lender’s loan commitment amount may be accepted or
rejected, in whole or in part, by the Company, in its sole and absolute

1

 

discretion. No commitment shall be deemed accepted until the Company has expressly accepted
such commitment by execution of the acceptance set forth on Lender’s signature page hereto.

2. Closing.

     2.1 Closing. The closing hereunder (the “Closing”) shall be held on the date hereof at the
offices of Schmeltzer, Aptaker & Shepard, P.C., 2600 Virginia Avenue, Suite 1000, Washington, D.C.
20037, or at such other time and place as the Company and the Lenders shall agree (the “Closing
Date”).

     2.2 Delivery. At the Closing, the Company shall deliver to each Lender a duly executed Note
for such Lender’s Loan Amount, and each Lender shall duly execute and deliver to the Company an
acceptance and acknowledgment for their respective Note as contemplated by the form of Note.

     2.3 Advances. Subject to the prior receipt of Requisite Stockholder Approval and the
expiration of the Stockholder Notice Period (each defined below), funds may be requested by the
Company and shall be advanced by the Lenders from time to time after the Closing on the terms and
conditions set forth in the Notes. Any such advances shall be requested and funded among the
Lenders on a Pro Rata basis. As used in this Agreement, each Lender’s “Pro Rata” share is the
ratio of (i) the total Loan Amount for such Lender to (ii) the total aggregate sum of the Loan
Amounts for all Lenders as set forth on Exhibit A hereto. Notwithstanding the foregoing, no advance
shall be made hereunder after the Termination Date (defined in Section 7).

3. Representations and Warranties of the Company. 

     The Company hereby represents and warrants to each Lender as follows:

     3.1 Corporate Power. Subject to the receipt of Requisite Stockholder Approval and the
expiration of the Stockholder Notice Period, the Company will have at the Closing Date all
requisite corporate power to execute and deliver this Agreement and to carry out and perform its
obligations under the terms of this Agreement.

     3.2 Authorization. Subject to the receipt of Requisite Stockholder Approval and the
expiration of the Stockholder Notice Period, all corporate action on the part of the Company, its
directors and its stockholders necessary for the authorization, execution, delivery and performance
of this Agreement and the Notes (collectively, the “Loan Documents”) by the Company and the
performance of the Company’s obligations hereunder and thereunder, including the issuance and
delivery of the Notes has been taken or will be taken prior to the issuance of such Notes. The
Loan Documents, subject to the receipt of Requisite Stockholder Approval and the expiration of the
Stockholder Notice Period, when executed and delivered by the Company, shall constitute valid and
binding obligations of the Company enforceable against the Company in accordance with their terms,
subject to laws of general application relating to bankruptcy, insolvency, the relief of debtors
and, with respect to rights to indemnity, subject to federal and state securities laws. Subject to
the receipt of Requisite Stockholder Approval and the expiration of the Stockholder Notice Period,
the Notes, when issued in compliance with the provisions of the Loan Documents, will be validly
issued. The issuance of the Notes pursuant to

2

 

the provisions of this Agreement will not violate any preemptive rights or rights of first
refusal granted by the Company that will not be validly complied with or waived. The Notes, when
issued in compliance with the provisions of the Loan Documents, will be free of any liens or
encumbrances, other than any liens or encumbrances created by or imposed upon the Lenders through
no action of the Company; provided, however, that the Notes may be subject to restrictions on
transfer under the Company’s Bylaws, state and/or federal securities laws and other agreements to
which the Lenders are parties.

     3.3 Governmental Consents. All consents, approvals, orders, or authorizations of, or
registrations, qualifications, designations, declarations, or filings with, any governmental
authority, required on the part of the Company in connection with the valid execution and delivery
of the Loan Documents, the offer, sale or issuance of the Notes, or the consummation of any other
transaction contemplated hereby shall have been obtained and will be effective at the Closing,
except for notices required or permitted to be filed with certain state and federal securities
commissions, which notices will be filed on a timely basis.

     3.4 Offering. Assuming the accuracy of the representations and warranties of the Lenders
contained in Section 4 hereof, the offer, issue, and sale of the Notes are and will be exempt from
the registration and prospectus delivery requirements of the Securities Act of 1933, as amended
(the “Securities Act”), and have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit, or qualification requirements of all applicable
state securities laws.

4. Representations and Warranties of the Lenders.

     Each Lender, severally and not jointly, hereby represents and warrants to the Company as
follows:

     4.1 Lending for Own Account. Such Lender represents that it is or will be acquiring the Notes
solely for its own account and not for sale or with a view to distribution of the Notes or any part
thereof, has no present intention of selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the same, and does not presently have
reason to anticipate a change in such intention.

     4.2 Information and Sophistication. Such Lender (i) acknowledges that it has received all the
information it has requested from the Company and it considers necessary or appropriate for
deciding whether to acquire the Notes, (ii) represents that it has had an opportunity to ask
questions and receive answers from the Company regarding the terms and conditions of the offering
of the Notes and to obtain any additional information necessary to verify the accuracy of the
information given such Lender and (iii) further represents that it has such knowledge and
experience in financial and business matters that it is capable of evaluating the merits and risk
of lending funds to the Company under this Agreement. Without limiting the foregoing, such Lender
is relying on its own independent investigation of the Company and on its own respective
professional advisors in entering into this Agreement and consummating the transactions described
herein, and not on the advice or recommendation of any other Lender or of counsel or the
professional advisors for any other Lender.

3

 

     4.3 Ability to Bear Economic Risk. Such Lender acknowledges that investment in the Notes
involves a high degree of risk, and represents that it is able, without materially impairing its
financial condition, to bear the credit risk of lending to the Company on a subordinated and
unsecured basis.

     4.4 Limitations on Transferability. Such Lender covenants that in no event will it dispose of
all or any portion of the Notes unless and until (a) the Lender shall have notified the Company of
the proposed disposition and shall have furnished the Company with a statement of the circumstances
surrounding the proposed disposition, and (b) if requested by the Company, the Lender shall have
furnished the Company with an opinion of counsel satisfactory in form and substance to the Company
and the Company’s counsel to the effect that (x) such disposition will not require registration
under the Securities Act and (y) appropriate action necessary for compliance with the Securities
Act and any applicable state, local, or foreign law has been taken; provided,
however, that notwithstanding the limitations previously set forth, (i) a Lender may
transfer Notes to its affiliates (as such term is defined in Regulation D promulgated under the
Securities Act) and (ii) if the Lender is a partnership it may transfer Notes to its constituent
partners or a retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner or transfer by gift, will, or intestate succession to
any such partner’s spouse or lineal descendants or ancestors, in each case without the necessity of
registration or opinion of counsel if the transferee agrees in writing to be subject to the terms
of this Agreement to the same extent if such transferee were a Lender (the persons set forth in
clauses (i) and (ii) being referred to as “Affiliates”); provided, however, that
Lender hereby covenants not to effect such transfer if such transfer either would invalidate the
securities laws exemptions pursuant to which the Notes were originally offered and sold or would
itself require registration and/or qualification under the Securities Act or applicable state
securities laws. Each Note transferred as above provided shall bear the appropriate restrictive
legend set forth in Section 4.5 below, except that such certificate shall not bear such legend if
the opinion of counsel referred to above is to the further effect that such legend is not required
in order to establish compliance with any provisions of the Securities Act.

     4.5 Each Lender understands and agrees that all Notes to be issued to such Lender shall be
stamped or otherwise imprinted with legends substantially similar to the following (in addition to
any legend required under the Company’s Bylaws and applicable state securities laws):

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”)
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY
HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL
THAT SUCH REGISTRATION IS NOT REQUIRED.

THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THIS NOTE IS SUBJECT TO THE
TERMS AND CONDITIONS OF A CERTAIN AMENDED AND RESTATED LINE OF CREDIT
AGREEMENT BY AND BETWEEN THE HOLDER AND THE

4

 

COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE COMPANY.

     4.6 Accredited Investor Status. Each Lender is an “accredited investor” as such term is
defined in Rule 501 under the Securities Act.

5. Further Assurances. The Company and each Lender agree and covenant that at any time
and from time to time they will promptly execute and deliver to each other such further instruments
and documents and take such further action as each of the parties hereto may reasonably require in
order to carry out the full intent and purpose of this Agreement.

6. Requisite Stockholder Approval and Notice.

     (a) As soon as practicable after the date of this Agreement, the Company shall take all steps
necessary to obtain Requisite Stockholder Approval either by written consent of its stockholders or
at a duly called stockholder meeting. In the event the Company determines to obtain Requisite
Stockholder Approval at a stockholder meeting, the Company shall, as soon as practicable following
the date of this Agreement, establish a record date in connection therewith and duly call, give
notice of, convene and hold a meeting of its stockholders for the purpose of obtaining Requisite
Stockholder Approval. As used herein, the term “Requisite Stockholder Approval” means the
affirmative vote or written consent of the holders of (i) a majority of the Company’s outstanding
voting securities, on an as-converted into common stock basis, (ii) at least 60% of the Company’s
outstanding Series A Preferred Stock, and (iii) at least 60% of the Company’s outstanding Series B
Preferred Stock, to (A) amend the Company’s certificate of incorporation, as amended, to provide
for the conversion into Common Stock of any outstanding shares of Series A Preferred Stock and
Series B Preferred Stock held by individuals or entities specified on Exhibit B hereto as
“Converted Stockholders” at a conversion rate of 1 share of Series A Preferred Stock or Series B
Preferred Stock for 0.125 shares of Common Stock (as adjusted for any stock splits, combinations,
stock dividends or other similar events after the Effective Date (the “Charter Amendment”), and (B)
to approve the transactions contemplated hereby, including the creation, authorization and issuance
of the Notes. Promptly following the Company’s receipt of Requisite Stockholder Approval, subject
to the expiration of the Stockholder Notice Period, the Company shall file and effect the Charter
Amendment with the Secretary of State of the State of Delaware.

     (b) As soon as practicable after the date of this Agreement, to the extent not previously
provided by the Company, the Company shall provide written notice (the “Stockholder Notice”) to
each holder of its Series A Preferred Stock and Series B Preferred Stock, by first class mail,
postage prepaid, addressed to such holder at the last address of such holder as shown by the
records of the corporation of the Company’s intention to file the Charter Amendment. Prior to the
expiration of 30 days following the delivery of the Stockholder Notice to holders of the Company’s
Series A Preferred Stock and Series B Preferred Stock (the “Stockholder Notice Period”), the
Company shall refrain from filing the Charter Amendment.

     (c) At any meeting of stockholders of the Company or at any adjournment thereof or in any
other circumstances upon which the Lender’s vote, consent or other approval is sought

5

 

(including by written consent), the Lender shall vote (or cause to be voted) all shares of the
Company’s voting securities held of record or beneficially owned by Lender in favor of the Charter
Amendment.

7. Termination of Advances. For purposes hereof, the “Termination Date” after which no
further advances may be made shall be the first to occur of:

     (a) April 30, 2006;

     (b) the date of closing of the Company’s first firm commitment underwritten public
offering of its Common Stock registered under the Securities Act (the “Initial Offering”);

     (c) the date of closing of the first equity financing after the date of this Agreement,
other than an Initial Offering, pursuant to which the Company raises in a single or series
of related transactions at least $10 million in aggregate cash proceeds (not including the
proceeds raised pursuant to this Agreement) (the “Next Equity Financing”);

     (d) the date of a Liquidity Event. “Liquidity Event” means a liquidation, dissolution
or winding up of the Company, as defined in the Company’s Amended and Restated Certificate
of Incorporation, as amended, but excluding from such definition of a liquidation,
dissolution or winding up of the Company the right of holders of at least sixty percent
(60%) of the Company’s then outstanding Series B Preferred Stock to determine not to treat
an event otherwise constituting a liquidation, dissolution or winding up of the Company as
such under the Company’s Amended and Restated Certificate of Incorporation, as amended; or

     (e) the date on which the Company delivers a written notice to the Lenders that it does
not intend to request any further advances under this Agreement.

8. Miscellaneous.

     8.1 Binding Agreement. The terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties. Nothing in this
Agreement, express or implied, is intended to confer upon any third party any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as expressly provided in
this Agreement.

     8.2 Governing Law. This Agreement shall be governed by and construed under the laws of the
State of Delaware excluding conflict of laws principles that would cause the application of laws of
any other jurisdiction. Any claim, cause of action, suit or demand allegedly arising out of or
related to this Agreement, or the relationship of the parties, shall be brought exclusively in the
state courts of Maryland or federal courts located in the State of Maryland, and the parties
irrevocably consent to the exclusive jurisdiction and venue of such courts and waive any objections
they may have at any time to such exclusive jurisdiction and venue.

6

 

     8.3 Waiver of Preemptive Rights under Stockholders’ Agreement. Pursuant to Section 12 of that
certain Stockholder’s Agreement, dated October 26, 2001, as amended, by and among the Company and
certain of the Company’s stockholders (the “Stockholders’ Agreement”), the Company and Lenders,
constituting the requisite parties to the Stockholders’ Agreement necessary to waive the observance
of certain provisions of the Stockholders Agreement implicated by this Agreement, hereby waive any
obligation of the Company under Section 7 of the Stockholders Agreement to offer each Stockholder
(as defined in the Stockholders’ Agreement”) the right to participate in the sale of the Notes
pursuant to this Agreement.

     8.4 Counterparts; Facsimile. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute one and the same
instrument. Facsimile signatures shall be as effective as original signatures.

     8.5 Expenses. Each party shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of the Agreement and the transactions contemplated
by the Agreement.

     8.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this Agreement.

     8.7 Notices. All notices required or permitted hereunder or under the Notes shall be in
writing (including facsimile, electronic mail or similar electronic transmissions), and shall be
deemed effectively given: (a) when received by the addressee, if delivered by hand, facsimile,
electronic mail or similar form of electronic transmission, (b) five days after mailing, if mailed
by registered or certified mail, return receipt requested, postage prepaid or (c) one day after
deposit with a nationally recognized overnight courier, specifying next day delivery, with written
verification of receipt. All communications shall be sent (i) to the Company at 20358 Seneca
Meadows Parkway, Germantown, MD 20876, Attention: President or Chief Financial Officer or (ii) to a
Lender at its address shown on Exhibit A, or at such other address as such party may designate by
written notice to the other party.

     8.8 Amendment; Waiver. No amendment or waiver of any provision of this Agreement shall be
effective unless in writing and approved by the Company and (i) if any principal or interest is
then outstanding under the Notes, Lenders then holding greater than 50% of the outstanding unpaid
principal and interest under all of the Notes or (ii) if no principal or interest is then
outstanding under the Notes, Lenders who as of the Closing hold Notes having an aggregate Loan
Amount representing greater than 50% of the total aggregate sum of the Loan Amounts for all Lenders
as of the Closing as set forth on Exhibit A hereto (in the case of (i) and (ii) above, the
“Majority Lenders”).

     8.9 Entire Agreement. This Agreement and the Exhibits hereto constitute the full and entire
understanding and agreement between the Company and the Lenders with regard to the subjects hereof
and no party shall be liable or bound to any other in any manner by any representations,
warranties, covenants and agreements except as specifically set forth herein. This Agreement and
the Exhibits hereto supersedes and replaces all prior oral or written

7

 

agreements, commitments or understandings (including the Original Agreement) with respect to
the matters provide for herein among the Company and the Lenders.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

8

 

     In Witness Whereof, the undersigned Lender has executed this Amended and Restated
Line of Credit Agreement as of the date first written above.

Lender:

	 	 	 	 	 
	If you are an individual, print your
name and sign below.	 	If you are signing on behalf of an
entity, please print the name of the
entity and your name and sign below
indicating your title.
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	 
	Name of Individual (Please Print)	 	Name of Entity (Please Print)
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	Signature

	 	 	 	Print Name of Authorized Person
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 

	 	 	 	Signature
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 

	 	 	 	Title

Loan Commitment: U.S. $                                   

Acceptance of Loan Commitment

     In Witness Whereof, the Company has executed this Line of Credit Agreement
as of the date first written above and hereby accepts the above loan commitment by Lender in the
amount of U.S. $                         .

Company:

Avalon Pharmaceuticals, Inc.

	 	 	 	 	 
	By:

	 	 	 	 
	 

	 	 	 	 
	 

	 	Print Name of Authorized Person	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	 
	Signature	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	 
	Title	 	 

 

 

LIST OF EXHIBITS

Exhibit A: Schedule of Lenders

Exhibit B: Schedule of Offered Individuals and Entities

Exhibit C: Form of Subordinated Promissory Note

 

 

Exhibit A

SCHEDULE OF LENDERS

	 	 	 	 	 
	Name & Address	 	Maximum Advance under Note
	AIG Horizon Partners Fund, L.P.
	 	$	133,910	 
	AIG Horizon Side-by-Side Fund, L.P.
	 	$	109,563	 
	AIG Private Equity Partners I, L.P.
	 	$	51,646	 
	c/o AIG Global Investment Group
	 	 	 	 
	Attention: Richard Drake
	 	 	 	 
	599 Lexington Avenue, 25th floor
	 	 	 	 
	New York, NY 10022
	 	 	 	 
	 
	 	 	 	 
	Alexandria Real Estate Equities, L.P. 91101
	 	$	55,335	 
	385 East Colorado Boulevard, Suite 299
	 	 	 	 
	Pasadena, CA
	 	 	 	 
	 
	 	 	 	 
	Bradley Lorimier
	 	$	6,940	 
	7807 Foxgate Court
	 	 	 	 
	Bethesda, MD 20817
	 	 	 	 
	 
	 	 	 	 
	Catalytix, LDC
	 	$	98,433	 
	Kenneth A. Sorensen
	 	$	10,000	 
	425 Fifth Avenue, 28th floor
	 	 	 	 
	Suite 28D
	 	 	 	 
	New York, NY 10016
	 	 	 	 
	 
	 	 	 	 
	EuclidSR Partners, L.P.
	 	$	295,200	 
	EuclidSR Biotechnology Partners, L.P.
	 	$	295,200	 
	Attention: Raymond Whitaker
	 	 	 	 
	45 Rockefeller Plaza, Ste 3240
	 	 	 	 
	New York, NY 10111
	 	 	 	 
	 
	 	 	 	 
	Forward Ventures IV, L.P.
	 	$	589,452	 
	Forward Ventures IV, B, L.P.
	 	$	49,971	 
	Attention: Ivor Royston
	 	 	 	 
	9393 Towne Centre Drive, Ste 200
	 	 	 	 
	San Diego, C A 92121
	 	 	 	 

A-1

 

	 	 	 	 	 
	Name & Address	 	Maximum Advance under Note
	 
	 	 	 	 
	GeneChem Therapeutics Venture Fund L.P.
	 	$	300,000	 
	c/o GeneChem Management, Inc.
	 	 	 	 
	Attention: Martial Lacroix, Ph.D.
	 	 	 	 
	1001 de Maisonneuve Quest, Suite 920
	 	 	 	 
	Montreal, Quebec
	 	 	 	 
	Canada H3A 3C8
	 	 	 	 
	 
	 	 	 	 
	GeneLogic, Inc.
	 	$	73,779	 
	610 Professional Drive
	 	 	 	 
	Gaithersburg, MD 20879
	 	 	 	 
	 
	 	 	 	 
	GIMV N.V.
	 	$	840,411	 
	Adviesbeheer GIMV Life Sciences N.V.
	 	$	148,308	 
	Attention: Patrick Van Beneden
	 	 	 	 
	Karel Oomsstraat 37
	 	 	 	 
	B-2108 Antwerpen
	 	 	 	 
	Belgium, Germany
	 	 	 	 
	 
	 	 	 	 
	H&Q Healthcare Investors
	 	$	295,118	 
	H&Q Life Science Investors
	 	$	196,746	 
	c/o H&Q Capital Management, Inc.
	 	 	 	 
	Attention: Daniel Omstead
	 	 	 	 
	30 Rowes Wharf, Ste 430
	 	 	 	 
	Boston, MA 02110-3328
	 	 	 	 
	 
	 	 	 	 
	KBL Healthcare, L.P.
	 	$	179,487	 
	KBL Partnership, L.P. I
	 	$	21,367	 
	645 Madison Avenue, 14th Floor
	 	 	 	 
	New York, NY 10022
	 	 	 	 
	 
	 	 	 	 
	MDS Life Sciences Technology Fund Limited Partnership
	 	$	177,678	 
	SC Biotechnology Development Fund, L.P.
	 	$	110,669	 
	MDS Life Sciences Technology Fund USA, L.P.
	 	$	42,010	 
	MDS Life Sciences Technology Fund Canadian Unit
Trust
	 	$	38,541	 
	MDS Life Sciences Technology Barbados Investment Trust
	 	$	27,545	 
	100 International Blvd.
	 	 	 	 
	Toronto Ontario, Canada
	 	 	 	 
	M9W 6J6
	 	 	 	 
	 
	 	 	 	 
	Mulligan BioCapital AG
	 	$	16,800	 
	Attention: Jens Klein
	 	 	 	 
	Stubbenhuk 7
	 	 	 	 
	20359 Hamburg
	 	 	 	 
	Germany
	 	 	 	 

A-2

 

	 	 	 	 	 
	Name & Address	 	Maximum Advance under Note
	 
	 	 	 	 
	Novartis BioVentures Ltd.
	 	$	39,349	 
	c/o Novartis Services, Inc.
	 	 	 	 
	Attention: Dr. Peter Bissinger
	 	 	 	 
	10675 John Jay Hopkins Drive
	 	 	 	 
	San Diego, CA 92121-1125
	 	 	 	 
	 
	 	 	 	 
	OrbiMed Associates, LLC
	 	$	3,087	 
	Caduceus Private Investments, L.P.
	 	$	148,289	 
	PW Juniper Crossover Fund, LLP
	 	$	69,963	 
	767 Third Avenue
	 	 	 	 
	30th Floor
	 	 	 	 
	New York, NY 10017
	 	 	 	 
	 
	 	 	 	 
	Oxford Bioscience Partners, III L.P.
	 	$	594,468	 
	Oxford Bioscience Partners (Bermuda), III, L.P.
	 	$	84,725	 
	Oxford Bioscience Partners (Adjunct), III, L.P.
	 	$	63,750	 
	mRNA Fund L.P.
	 	$	7,057	 
	c/o Oxford Bioscience Partners
	 	 	 	 
	Attention: Alan G. Walton, Ph.D.
	 	 	 	 
	315 Post Road West
	 	 	 	 
	Westport, CT 06880
	 	 	 	 
	 
	 	 	 	 
	Paul Millman Revocable Trust
	 	$	7,397	 
	c/o Chroma Technology Group
	 	 	 	 
	P.O. Box 489
	 	 	 	 
	10 Imtec Lane
	 	 	 	 
	Rockingham, VT 05101
	 	 	 	 
	 
	 	 	 	 
	Royal Bank of Canada
	 	$	490,000	 
	2001 RBCP Canadian GP Limited
	 	$	0	 
	c/o RBC Capital Partners
	 	 	 	 
	Robert Bechard, Partner
	 	 	 	 
	1 Place Ville-Marie
	 	 	 	 
	9th Floor, South Wing
	 	 	 	 
	Montreal, Quebec
	 	 	 	 
	H3C 3A9
	 	 	 	 
	CANADA
	 	 	 	 

A-3

 

	 	 	 	 	 
	Name & Address	 	Maximum Advance under Note
	 
	 	 	 	 
	Sofinov Société Financière D’Innovation
	 	$	590,600	 
	c/o CDP Capital-Technology Ventures (Sofinov)
	 	 	 	 
	Attention: Annette Bianchi
	 	 	 	 
	VantagePoint Venture Partners
	 	 	 	 
	1001 Bayhill Drive, Ste 300
	 	 	 	 
	San Bruno, CA 94066
	 	 	 	 

A-4

 

Exhibit B

SCHEDULE OF OFFERED INDIVIDUALS AND ENTITIES

	 	 	 	 	 
	Name of Offered Individuals and Entities	 	Converted Stockholder 1
	 	 	Yes	 	No
	AIG Horizon Partners Fund, L.P.

	 	 	 	X
	AIG Horizon Side-by-Side Fund, L.P.

	 	 	 	X
	AIG Private Equity Partners I, L.P.

	 	 	 	X
	 
	 	 	 	 
	Alexandria Real Estate Equities, L.P.

	 	 	 	X
	 
	 	 	 	 
	Ariane Health Ltd. LDC

	 	X	 	 
	 
	 	 	 	 
	Bradley Lorimier

	 	 	 	X
	 
	 	 	 	 
	Catalytix, LDC

	 	 	 	X
	Kenneth A. Sorensen

	 	 	 	X
	 
	 	 	 	 
	David L. Entin

	 	 	 	X
	 
	 	 	 	 
	ETP/FBR Venture Capital, LLC as Nominee

	 	X	 	 
	 
	 	 	 	 
	EuclidSR Partners, L.P.

	 	 	 	X
	EuclidSR Biotechnology Partners, L.P.

	 	 	 	X
	 
	 	 	 	 
	Forward Ventures IV, L.P.

	 	 	 	X
	Forward Ventures IV, B, L.P.

	 	 	 	X
	 
	 	 	 	 
	GATX Ventures, Inc.

	 	X	 	 
	 
	 	 	 	 
	GeneChem Therapeutics Venture Fund L.P.

	 	 	 	X
	 
	 	 	 	 
	GeneLogic, Inc.

	 	 	 	X
	 
	 	 	 	 
	GIMV N.V.

	 	 	 	X
	Adviesbeheer GIMV Life Sciences N.V.

	 	 	 	X
	 
	 	 	 	 
	H&Q Healthcare Investors

	 	 	 	X
	H&Q Life Science Investors

	 	 	 	X
	 
	 	 	 	 
	JAFCO L-2 Venture Capital Investment Limited

Partnership

	 	X	 	 

B-1

 

	 	 	 	 	 
	Name of Offered Individuals and Entities	 	Converted Stockholder 1
	 	 	Yes	 	No
	JAFCO GC-1 Investment Enterprise Partnership

	 	X	 	 
	 
	 	 	 	 
	Jonathan Cool

	 	 	 	X
	 
	 	 	 	 
	KBL Healthcare, L.P.

	 	 	 	X
	KBL Partnership, L.P. I

	 	 	 	X
	 
	 	 	 	 
	MDS Life Sciences Technology Fund Limited

Partnership
	 	 	 	 
	SC Biotechnology Development Fund, L.P.
	 	 	 	 
	MDS Life Sciences Technology Fund USA, L.P.

	 	 	 	X
	MDS Life Sciences Technology Fund Canadian

Unit Trust

	 	 	 	X

X
	MDS Life Sciences Technology Barbados

Investment Trust

	 	 	 	X

X
	 
	 	 	 	 
	Mulligan BioCapital AG

	 	 	 	X
	 
	 	 	 	 
	National Bank Trust for Altamira Equity Fund
	 	 	 	 
	National Bank Trust for Altamira Heath
Sciences Fund (formerly Mac & Co.)

	 	X

X	 	 
	 
	 	 	 	 
	Novartis BioVentures Ltd.

	 	 	 	X
	 
	 	 	 	 
	OrbiMed Associates, LLC

	 	 	 	X
	Caduceus Private Investments, L.P.

	 	 	 	X
	PW Juniper Crossover Fund, LLP

	 	 	 	X
	 
	 	 	 	 
	Oxford Bioscience Partners, III L.P.

	 	 	 	X
	Oxford Bioscience Partners (Bermuda), III, L.P.

	 	 	 	X
	Oxford Bioscience Partners (Adjunct), III, L.P.

	 	 	 	X
	mRNA Fund L.P.

	 	 	 	X
	 
	 	 	 	 
	Paul Millman Revocable Trust

	 	 	 	X
	 
	 	 	 	 
	Rock Castle Ventures, L.P.

	 	X	 	 
	 
	 	 	 	 
	Royal Bank of Canada

	 	 	 	X
	2001 RBCP Canadian GP Limited

	 	 	 	X
	 
	 	 	 	 
	Sofinov Société Financière D’Innovation

	 	 	 	X
	 
	 	 	 	 
	Susan Bierman Gruhin & Mark I. Gruhin, JT. TEN.

	 	 	 	X
	 
	 	 	 	 
	Ying-Fei Wei and Guo-Liang Yu

	 	 	 	X

 

			
	1	 	“X” mark indicates whether the offered individual’s/entity’s shares of Series A
Preferred Stock and/or Series B Preferred Stock are to be converted into Common Stock pursuant to
the Charter Amendment described above.

B-2

 

Exhibit C

FORM OF SUBORDINATED PROMISSORY NOTE

C-1

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THIS NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF
A CERTAIN LINE OF CREDIT AGREEMENT BY AND BETWEEN THE LENDER AND THE COMPANY. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.

AVALON PHARMACEUTICALS, INC.

AMENDED AND RESTATED SUBORDINATED PROMISSORY NOTE

			
	Up to $                                        
	 	September 8, 2005

Germantown, Maryland

     For Value Received, Avalon Pharmaceuticals, Inc., a Delaware corporation
(the “Company”), hereby promises to pay to
the order of
[___]
(the “Lender”),
the principal sum of up to ___($___) (the “Maximum Principal
Amount”), or such aggregate lesser amount as may have been advanced and be outstanding hereunder as
set forth on Exhibit A hereto, as amended from time to time, together with accrued and unpaid
interest thereon, each due and payable on September 30, 2006 (“Maturity” and such date the
“Maturity Date”) and in the manner set forth below.

     This Note is issued pursuant to the Amended and Restated Line of Credit Agreement dated
September ___, 2005 among the Company and the Lenders listed on the Schedule of Lenders attached
thereto as Exhibit A (the “Credit
Agreement”) and replaces the original note (the
“Original Note”),
if any, issued to Lender pursuant to the Line of Credit Agreement dated August 30, 2005 among the
Company and the Lenders listed on the Schedule of Lenders attached thereto as Exhibit A (the
“Original Agreement”) in accordance with Section 8.8 of the Original Agreement and Section 3.3 of
the Original Note. Additional rights and obligations of the Lender are set forth in the Credit
Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings given
them in the Credit Agreement.

5. Interest. Interest shall accrue on the outstanding principal amount advanced hereunder from the
date of each Cash Advance (as defined below) under this Note until payment or conversion in full,
which interest shall be payable at eight percent (8%) per annum, or the maximum rate permissible by
law (which under the laws of the State of Delaware shall be deemed to be the laws relating to
permissible rates of interest on commercial loans), whichever is less. Interest shall be due and
payable on the Maturity Date, and shall be calculated on the basis of a 365-day year for the actual
number of days elapsed.

C-2

 

6. Intentionally Omitted.

7. Payment. Payment shall be made in lawful money of the United States to the Lender at the
Company’s principal offices or, at the option of the Lender, at such other place in the United
States as Lender shall have designated by written notice to the Company. The Company reserves the
right to prepay all or any portion of the principal amount of this Note at any time without penalty
or premium. All payments shall be applied first to accrued interest and thereafter to principal
and shall be made pro rata to all holders of Notes on the basis of the amount of all unpaid
principal and accrued interest then outstanding under each Note relative to the aggregate unpaid
principal and accrued interest then outstanding under all the Notes.

8. Cash Advances.

     8.1 Cash Advances. Subject to the receipt of Requisite Stockholder Approval and expiration of
the Stockholder Notice Period and the other terms and conditions contained herein, at any time and
from time to time while this Note is outstanding and prior to the Termination Date, the Company
may, upon the unanimous approval of its Board of Directors, request to borrow from the Lender an
amount, as determined by the Board of Directors, up to the remainder of the Maximum Principal
Amount that has not theretofore been advanced to the Company by such Lender; provided, that any
such request (i) may not be made more frequently than once each month while this Note is
outstanding and (ii) must pertain to a drawdown of an aggregate amount of at least $1 million (or,
if lesser, the Maximum Principal Amount then remaining unborrowed). Each amount actually advanced
to the Company under this Note is herein called a “Cash
Advance(s)” and shall be listed on Exhibit
A hereto.

     8.2 Requests for Cash Advance. Each request made by the Company for a Cash Advance (a “Cash
Advance Request”) shall be substantially in the form of Exhibit B attached hereto and delivered to
the Lender at the Lender’s address indicated in the Credit Agreement, or at such other address as
the Lender shall have designated by written notice to the Company. Subject to the terms and
conditions contained herein, the Lender shall, within 14 days after receipt of a Cash Advance
Request, deliver to the Company the amount of the requested Cash Advance by check or wire transfer,
in accordance with the Company’s instructions.

9. Payment in Event of Liquidity Event. In the event there shall occur a Liquidity Event prior to
the Maturity Date, subject to the subordination provisions of Section 15 hereof, this Note shall
accelerate and shall be immediately due and payable in an amount equal to (i) if no Initial
Offering has occurred prior thereto, 400% of the principal amount of this Note plus accrued and
unpaid interest thereon and (ii) if an Initial Offering has occurred prior thereto, 100% of the
principal amount of this Note plus accrued and unpaid interest thereon.

10. Termination of Rights. All rights with respect to this Note shall terminate upon the payment
of all outstanding principal and accrued interest outstanding under this Note, whether or not this
Note has been surrendered.

11. Intentionally Omitted.

12. No Impairment. Except and to the extent as waived or consented to in accordance with Section
13 below, the Company will not, by amendment of its certificate of incorporation

C-3

 

or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of any debt or equity securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed hereunder by the Company,
but will at all times in good faith assist in the carrying out of all the provisions of this Note
in order to protect the rights of Lender hereunder against impairment.

13. Highest Lawful Rate. Anything herein to the contrary notwithstanding, if during any period for
which interest is computed hereunder, the amount of interest computed on the basis provided for in
this Note, together with all fees, charges, and other payments or rights which are treated as
interest under applicable law, as provided for herein or in any other document executed in
connection herewith, would exceed the amount of such interest computed on the basis of the Highest
Lawful Rate (as defined below), the Company shall not be obligated to pay, and the Lender shall not
be entitled to charge, collect, receive, reserve, or take, interest in excess of the Highest Lawful
Rate, and during any such period the interest payable hereunder shall be computed on the basis of
the Highest Lawful Rate. “Highest Lawful Rate” means the maximum non-usurious rate of interest, as
in effect from time to time, which may be charged, contracted for, reserved, received, or collected
by the Lender in connection with this Note under applicable law. In accordance with this section,
any amounts received in excess of the Highest Lawful Rate shall be applied towards the prepayment
of principal then outstanding.

14. Waiver. Subject to any other provision herein or in the other Loan Documents, the Company
hereby waives demand, notice, presentment, protest and notice of dishonor.

15. Governing Law. This Note shall be governed by, and construed and enforced in accordance with,
the laws of Delaware, excluding conflict of laws principles that would cause the application of
laws of any other jurisdiction. Any claim, cause of action, suit or demand allegedly arising out
of or related to this Note, or the relationship of the parties, shall be brought exclusively in the
state courts of Maryland or federal courts located in the State of Maryland, and the parties
irrevocably consent to the exclusive jurisdiction and venue of such courts and waive any objections
they may have at any time to such exclusive jurisdiction and venue. The Company promises to pay all
costs of collection, including reasonable attorney fees, upon default in the payment of the
principal of this Note or interest hereon when due, whether at maturity, as herein provided, or by
reason of acceleration of maturity under the terms hereof, whether suit be brought or not.

16. Successors and Assigns. Neither this Note nor any rights hereunder shall be transferable by
the Lender without the prior written consent of the Company, except to an Affiliate of the Lender
that agrees in writing to be subject to the terms of this Note to the same extent as if such
Affiliate were an original Lender hereunder. Subject to the foregoing, the provisions of this Note
shall inure to the benefit of and be binding on any successor to the Company and shall extend to
any holder hereof.

17. Amendment; Waiver. Any term of this Note may be amended or waived with the written consent of
the Company and the Majority Lenders; provided, however, that any amendment to Exhibit A to reflect
any additional Cash Advances made pursuant to Section 4 hereof may be made without further action
by the Company or any of the Lenders.

C-4

 

18. Counterparts; Facsimile. This Note may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and the same
instrument. Facsimile signatures shall be as effective as original signatures.

19. Subordination. The Company covenants and agrees, and the Lender, by its acceptance of this
Note, hereby covenants and agrees as follows:

     (a) The indebtedness evidenced by this Note, as it may be amended, modified, extended, renewed
or substituted from time to time, and all obligations of the Company to pay the principal of and
interest on this Note, and all other amounts and liabilities under this Note, whether such
indebtedness, obligations and liabilities are now existing or hereafter arising (collectively, the
“Subordinated Obligations”) are hereby expressly subordinated to and in favor of the indefeasible
and full payment in cash of all of the Senior Indebtedness, as hereinafter defined, to the extent
and in the manner hereinafter set forth.

     (b) As used herein, the term Senior Indebtedness shall mean indebtedness, liabilities and
obligations of the Company to Manufacturers and Traders Trust Company
(“Bank”) of every kind and
nature whatsoever, whether now existing or hereafter arising or created any time, including
without limitation, all indebtedness, liabilities and obligations of the Company to the Bank which
are direct, indirect, contingent, primary, secondary, alone, jointly with others, due, to become
due, unsecured, secured, or future advances and including, without limitation, all liabilities,
indebtedness and obligations of the Company to the Bank.

     (c) Until the Senior Indebtedness has been fully and indefeasibly paid in cash, the Lender
shall not, without prior written consent of the Bank, ask for, demand, accelerate, declare a
default under, sue for, set off, accept or receive any payment of all or any part of the
Subordinated Obligations except that the Lender may receive securities that are subordinate to the
Senior Indebtedness to at least the same extent as the Subordinated Obligations.

     (d) The Lender and the Company agree, represent and warrant that the Subordinated Obligations
are not secured in any way, directly or indirectly, including, without limitation, by security
agreement, pledge agreement, guaranty agreement, mortgage, deed of trust, or any other document,
lien, encumbrance or otherwise.

     (e) In the event of any distribution, division or application, partial or complete, voluntary
or involuntary, by operation of law or otherwise, of all or any part of the assets of the Company
or the proceeds thereof to creditors of the Company or to any indebtedness, liabilities and
obligations of the Company, by reason of the liquidation, dissolution or other winding up of the
Company or the Company’s business, or in the event of any sale, receivership, insolvency or
bankruptcy proceeding, or assignment for the benefit of creditors, or any proceeding by or against
the Company for any relief under any bankruptcy or insolvency law, then any payment or
distributions of any kind or character, either in cash, securities or other property, which shall
be payable or deliverable upon or with respect to all or any part of the Subordinated Obligations
shall be paid or delivered directly to the Bank for application to the Senior Indebtedness (whether
due or not due and in such order and manner as the Bank may elect; and including, without
limitation, any interest accruing subsequent to

C-5

 

the commencement of any such event or proceeding) until the Senior Indebtedness shall have
been fully paid and satisfied. The Lender hereby irrevocably authorizes and empowers the Bank, and
irrevocably appoints the Bank the Attorneys-in fact for the Lender to demand, sue for, collect and
receive every such payment or distribution and give acquittance therefor and to file claims and
take such other proceedings in the name of the Bank or in the names of the Lender or otherwise, as
the Bank may deem necessary or advisable to carry out the provisions hereof.

     (f) The Company and the Lender agrees that the Bank is a third-party beneficiary of the
subordination provisions of any Subordinated Obligations and shall be entitled to enforce such
provisions by proceedings at law or in equity or otherwise. If any of the Senior Indebtedness
should be transferred or assigned by the Bank, the provisions of this Note (or any other note
evidencing any Subordinated Obligations) will inure to the benefit of the transferee and assignee
to the extent of such transfer or assignment, provided that the Bank shall continue to have the
unimpaired right to enforce the provisions of this Note (or any other note evidencing any
Subordinated Obligations) as to any of the Senior Indebtedness not so transferred or assigned. The
subordinate provisions of any Subordinated Obligations shall be binding upon the Lender and the
Company and their respective successors and assigns. None of the subordinate provisions of any
Subordinated Obligations may be waived, modified or amended without the prior written consent of
the Bank, or if any of the Senior Indebtedness has then been transferred or assigned, by the then
holders or obliges of all of the Senior Indebtedness.

     (g) The Company shall provide written notice to the Lender as to any additional Senior
Indebtedness incurred by or agreed to by the Company after the date hereof and during such time
that any amounts are outstanding under any Subordinated Obligations.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

C-6

 

     In Witness Whereof, the Company has caused this Amended and Restated Subordinated
Promissory Note to be executed by its duly authorized officer as of the date first written
above.

	 	 	 	 	 
	 	Avalon Pharmaceuticals, Inc.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

[Signature Page to Amended and Restated Subordinated Promissory Note]

C-7

 

Acknowledged and Accepted:

	 	 	 	 	 	 	 
	Lender:
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	If you are an individual, print your
name and sign below.	 	 	 	If you are signing on behalf of an
entity, please print the name of the
entity and your name and sign below
indicating your title.
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	Name of Individual (Please Print)	 	 	 	Name of Entity (Please Print)
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	By:	 	 
	 

	 	 	 	 	 	 
	Signature

	 	 	 	 	 	Print Name of Authorized Person
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	Signature
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	Title

[Signature Page to Amended and Restated Subordinated Promissory Note]

C-8

 

EXHIBIT A

LIST OF CASH ADVANCES

	 	 	 	 	 
	Date of Request	 	 	 	Amount of Cash Advance
	 	 	 	 	 
	Cash Advance on                                         

	 	 	 	$[                    ]
	 
	 	 	 	 
	 

	 	TOTAL:
	 	$[                    ]

C-9

 

EXHIBIT B

FORM
OF CASH ADVANCE REQUEST

                                        , 200_

	 	 	 
	To:

	 	[Lender]
	 

	 	Attn:

Dear Sir:

     We refer to the Amended and Restated Subordinated Promissory Note dated as of September ___,
2006 (called the “Note”) between                                         and [Lender]. Terms defined in
the Note have the same meanings in this Cash Advance Request.

     We hereby request pursuant to the Note and on                                         , 20___[date of proposed Advance]
a Cash Advance of $                                        , payable by [ ] your check or [ ] wire transfer, in accordance with
our instructions.

     Concurrently herewith, we are requesting the following amounts from the other holders of
Notes, which together with the amount requested hereunder are being requested on a Pro Rata basis
in accordance with Section 2.3 of the Credit Agreement:

$                    

$                    

$                    

	 	 	 	 	 
	 	 	Very truly yours,
	 
	 	 	 	 
	 	 	Avalon Pharmaceuticals, Inc.
	 
	 	 	 	 
	 
	 	 	 	 
	 

	 	By:	 	 
	 

	 	 	 	 
	 

	 	Name:	 	 
	 

	 	 	 	 
	 

	 	Title:	 	 
	 

	 	 	 	 

C-10

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