Mail Stop 6010
July 6, 2005
Kenneth C. Carter, Ph.D.
President and Chief Executive Officer
Avalon Pharmaceuticals, Inc.
20358 Seneca Meadows Parkway
Germantown, MD 20876
Re: Avalon Pharmaceuticals, Inc.
Amendment No. 1 to the Registration Statement on Form S-1
File No. 333-124565
Dear Dr. Carter:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form S-1
Prospectus Summary, page 1
1. We note your response to comment 7 and reissue the comment. Our
comment was not intended for you to justify your description of
your
company as a "clinical stage biopharmaceutical company." Rather,
our
comment seeks for you to explain what you mean by "clinical stage
biopharmaceutical company" in the document as we believe such term
constitutes a technical term that some of your readers may not
understand. In that regard, please revise the disclosure to
explain
what you mean by "clinical stage biopharmaceutical company."
Use of Proceeds, page 24
2. We note your response to comment 23 and reissue the comment in
part. Our comment sought for you to disclose more specific
information regarding each of the categories you listed in the
bullet
points. While we note you have provided an aggregate range of the
proceeds to be used for the development of your AVN944 program,
the
development of additional lead programs, the selection of drug
candidates and acquisition, licensing and protection of
intellectual
property rights, we seek for you to provide an approximate range
of
the proceeds that you intend to use for each of these categories
separately. If you are unable to provide this information, please
so
indicate the reasons why in your document. Please revise your
document accordingly. Please also provide the approximate timing
of
these expenditures.
In addition, with respect to your disclosure concerning the
development of additional lead programs, please indicate what lead
programs you are referring to. For example, are you referring to
your
research related to your Beta-catenin and aurora kinase programs?
If
yes, please so indicate and also indicate what stage in
development
you expect to be after expenditure of these proceeds regarding
those
two programs.
Financial Statements, page F-1
Report of Independent Registered Public Accounting Firm, page F-2
3. Please include an independent registered public accountant`s
report with no restrictive legend in the amendment for which
effectiveness will be requested.
Notes to Financial Statements, page F-8
Note 3 - Summary of Significant Accounting Policies, page F-8
Revenue Recognition, page F-10
4. Please expand your revised disclosures in response to comment
46
to clarify, if true, that milestone payments are recognized when
substantive effort was necessary to achieve the milestone and the
amount of the milestone payment is commensurate with the level of
effort expended or advise us further.
Note 7. Stockholders` Deficit, page F-18
Stock Options, page F-18
5. We are considering your response to comment 47. Please address
the following:
* Please demonstrate to us that the compensation charge to be
recorded in the second quarter of 2005 is de minis to the
financial
statements for the year ended December 31, 2004 and the quarters
ended March 31, 2005 and June 30, 2005. Please explain to us the
qualitative factors that you considered in your decision not to
record the compensation charges in the proper periods.
* Tell us how your compensation charge will affect your disclosure
of
the fair value of the common stock and intrinsic value of options
at
each grant date.
* Please clarify your disclosures to state whether the valuation
using a retrospective methodology was performed by a related party
valuation specialist.
* Disclose in MD&A:
o The intrinsic value of outstanding vested and unvested stock
options based on the estimated IPO price and the stock options
outstanding as of the most recent balance sheet date.
o A discussion of the significant factors, assumptions,
methodologies
used in determining fair value.
o A discussion of each significant factor contributing to the
difference between fair value as of the grant date and the
estimated
IPO price.
o The valuation alternative method used and discuss why management
chose not to select a contemporaneous valuation by an unrelated
valuation specialist.
6. Please disclose your basis for classifying the unsecured
convertible notes issued in February 2005 as permanent equity and
explain to us.
Accountants` Consent
7. Please provide a currently dated and appropriately signed
consent
from your independent accountants in the amendment for which you
will
request effectiveness.
* * *
File a pre-effective amendment in response to these
comments.
Provide a letter keying your responses to the comments, and
provide
any requested supplemental information. If you believe complying
with these comments is not appropriate, tell us why in your
letter.
The response letter should be uploaded to EDGAR, with the form
type
label "CORRESP" and linked to the registration statement file
number.
We may have comments after reviewing revised materials and your
responses.
Submit your request for acceleration at least two business
days
prior to the requested effective date.
You may contact Christine Allen at (202) 551-3652 or Don Abbott at
(202) 551-3608 if you have questions regarding comments on the
financial statements and related matters. Please contact Song
Brandon at (202) 551-3621, John Krug, Senior Attorney, at (202)
551-
3862 or me at (202) 551-3710 with any other questions.
Sincerely,
Jeffrey Riedler
Assistant Director
cc: Michael J. Silver, Esq.
Stephanie D. Marks, Esq.
Hogan & Hartson LLP
111 South Calvert Street
Baltimore, MD 21202
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