COLLABORATION AGREEMENT between AVALON PHARMACEUTICALS, INC. and CHEMDIV, INC.

Exhibit 10.01

COLLABORATION AGREEMENT
between
AVALON PHARMACEUTICALS, INC.
and
CHEMDIV, INC.

dated as of July 25, 2006

COLLABORATION AGREEMENT

     THIS COLLABORATION AGREEMENT dated as of the 25th day of July, 2006 (the “Agreement”) is made between Avalon Pharmaceuticals, Inc., a Delaware corporation having its principal place of business at 20358 Seneca Meadows Parkway, Germantown, Maryland 20876 (“Avalon”) and ChemDiv, Inc., a Wisconsin corporation having its principal office at 11558 Sorrento Valley Road, San Diego, California 92121 (“ChemDiv,” and together with Avalon, the “Parties”).

RECITALS

     WHEREAS, ChemDiv has know-how, expertise, intellectual property rights and technology with respect to chemical libraries and chemical synthesis; and

     WHEREAS, Avalon possesses know-how, expertise, intellectual property rights and technology with respect to screening of libraries to identify compounds of interest and the development of compounds; and

     WHEREAS, the Parties desire to form a collaboration for the co-development and commercialization of certain products.

     NOW THEREFORE, in consideration of the premises and of the covenants herein contained, the Parties hereto mutually agree as follows:

ARTICLE 1

DEFINITIONS

     For purposes of this Agreement, the terms defined in this Article shall have the meanings specified below, whether used in their singular or plural form:

     1.1 “Affiliate” with respect to either Party, means any corporation or other entity which controls, is controlled by, or is under common control with that Party. A corporation or other entity shall be regarded as in control of another corporation or entity if it directly or indirectly owns or controls more than fifty percent (50%) of the voting stock or other ownership interest of the other corporation or entity, or if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or other entity or the power to elect or appoint fifty percent (50%) or more of the members of the governing body of the corporation or other entity.

     1.2 “Applicable Percentage” means * percent (*%).

     1.3 “Approved Target” means a Target selected by the Parties for screening.

     1.4 “Avalon Invention” means any Invention that is conceived by employees of Avalon or others acting on behalf of Avalon, other than a Collaboration Invention.

     1.5 “Avalon Patent Rights” shall mean any and all claims of Patent Rights (other than Collaboration Patent Rights) owned by Avalon as of the Effective Date or during the term of this Agreement or licensed to Avalon as of the Effective Date or during the term of this Agreement with the right to grant a sublicense, which claim would be or is infringed by the development, manufacture, use, sale, offer for sale or import of Product.

     1.6 “Avalon Know-How” means Know-How owned or controlled by Avalon, or licensed to Avalon as of the Effective Date or owned by Avalon during the term of this Agreement or licensed to Avalon during the term of this Agreement with the right to grant a sublicense during the term of this Agreement, in each case that relates to or is useful for the development, obtaining regulatory approval for, manufacture, use or commercialization of Product. For the avoidance of doubt, Avalon Know-How does not include Know-How for

screening against Targets and/or for identifying compounds with activity against Targets and/or libraries, and does not include Collaboration Compounds or Collaboration Inventions.

     1.7 “Business Day” shall mean each day of the week excluding Saturday, Sunday and U.S. Federal holidays.

     1.8 “ChemDiv Invention” means any Invention that is conceived during the term of this Agreement by employees of ChemDiv or others acting on behalf of ChemDiv other than a Collaboration Invention.

     1.9 “ChemDiv Library” means the collection of more than * compounds in the possession of ChemDiv.

     1.10 “ChemDiv Patent Rights” means any and all claims of Patent Rights (other than Collaboration Patent Rights) owned by ChemDiv as of the Effective Date or during the term of this Agreement and/or licensed to ChemDiv as of the Effective Date or during the term of this Agreement with the right to grant a sublicense which claim would be infringed by the development, manufacture, use, sale, offer for sale or import of Product.

     1.11 “ChemDiv Know-How” means Know-How owned by ChemDiv as of the Effective Date or during the term of this Agreement or licensed to ChemDiv as of the Effective Date or during the term of this Agreement with a right to grant a sublicense thereunder, in each case that relates to or is useful for the development, obtaining regulatory approval for, manufacture, use or commercialization of Product. For the avoidance of doubt, ChemDiv Know-How does not include Know-How for screening against Targets and/or for identifying compounds with activity against a target and/or libraries that are not Selected Compounds and does not include Collaboration Compounds or Collaboration Inventions.

     1.12 “Collaboration Compounds” means, with respect to each Project, (i) any and all compounds first synthesized by or on behalf of a Party pursuant to a Project prior to the Opt-Out Date for such Project, (ii) all isomers, enantiomers, hydrates, conjugates, esters, racemates, polymorphs, and metabolites of any of the foregoing compounds, (iii) all salt forms of any of the foregoing compounds, and (iv) all prodrugs of any of the foregoing compounds.

     1.13 “Collaboration Inventions” means any Invention conceived by an employee of a Party and/or by a person or entity obligated to assign such an Invention to a Party pursuant to work on a Project prior to the Opt-Out Date for the Project, which Invention is directed to a Collaboration Compound, a composition containing a Collaboration Compound, or a process of using or making a Collaboration Compound or composition containing a Collaboration Compound.

     1.14 “Collaboration Patent Right” means Patent Rights that claim a Collaboration Invention, a Collaboration Compound and/or manufacture and/or use thereof. For the avoidance of doubt, such Collaboration Patent Rights may also claim analogs and/or derivatives of Collaboration Compounds and/or manufacture and/or use thereof and such claims are included in Collaboration Patent Rights.

     1.15 “Collaboration Rights” means individually and collectively Collaboration Compounds, Collaboration Patent Rights and Collaboration Inventions.

     1.16 “Development Compound” means, with respect to each Project, a compound identified or synthesized pursuant to the Project prior to the Opt-Out Date for the Project that is designated for further development to obtain Regulatory Approval thereof, which designation shall be made prior to the Opt-Out Date for the Project by the JSC and after the Opt-Out Date for the Project, by the Selling Party.

     1.17 “Development Costs” with respect to Product means the costs incurred or accrued by the Parties with respect to work performed by the Parties or their respective Affiliates in accordance with the Development Plan in connection with the conduct of process and manufacturing development, development of Product and Regulatory Approvals and related activities including, but not limited to, data management, statistical designs and studies, document preparation and other expenses associated with the clinical testing program for Product, clinical grants, clinical laboratory fees, positive controls and the cost of studies conducted and services provided by contract research organizations and individuals, consultants, toxicology contractors, and manufacturers necessary or useful for the purpose of obtaining Regulatory Approvals for Product, costs for preparing, submitting, reviewing or developing data or information for the purpose of submission of applications to obtain Regulatory Approvals for Product which costs are limited to, (a) direct, out-of-pocket external costs, (b) the Fully Absorbed Cost of Goods for batches of Product manufactured and supplied for use in pre-clinical and clinical trials and pre-commercialization activities and (c) work performed by ChemDiv and Avalon FTEs charged at the FTE Rate. All cost determinations made hereunder shall be made in accordance with GAAP.

     1.18 “Development Plan” means for each Project, each development plan and amendments thereto that is approved by the JSC.

     1.19 “Development Program” means for each Project the activities to develop and manufacture a Product, including pre-clinical, non-clinical and clinical activities with respect to Product, and/or activities to develop a manufacturing process and to have manufactured Product, and/or to obtain Regulatory Approval for Product.

     1.20 “Earnings” means the positive or negative amount that is calculated on a Product-by-Product basis in accordance with GAAP, by deducting Product Costs from Revenue.

     1.21 “Effective Date” means the date first set forth above.

     1.22 “FDA” means the United States Food and Drug Administration or any successor agency with responsibilities comparable to those of the United States Food and Drug Administration.

     1.23 “First Commercial Sale” means the first sale of a Product for consumption by the general public in a country.

     1.24 “Fixed Costs” means the costs of facilities, utilities, insurance, facility and equipment depreciation and other such fixed costs (including payments to Third Parties other than those included in Product Costs) that are directly related to the applicable activity, allocated based upon the proportion of such costs directly attributable to support of the applicable activity, which in all cases, Fixed Costs shall exclude costs and charges related to unused capacity, and amortization of property not directly related to the activity.

     1.25 “ FTE ” means a full-time equivalent person year consisting of * hours per year of scientific or technical work.

     1.26 “ FTE Rate ” means an annual rate per FTE. The FTE Rate includes Fixed Costs (excluding payments to Third Parties). The FTE Rate for a Party for a calendar year shall be the FTE Rate as calculated for such Party for the previous calendar year based on actual costs for such previous calendar year.

     1.27 “Fully Absorbed Cost of Goods” with respect to Product means (a) the Variable Costs and Fixed Costs incurred by or on behalf of a Party or its Affiliates associated with the

manufacture (inclusive of finishing processes) of Product or (b) if the Product is not manufactured by the Parties, production campaign or costs of the transfer price for Product purchased from Third Party manufacturers. Fixed Costs shall be allocated to the Product based upon the proportion of such costs directly attributable to support of the manufacturing process for the Product. If a facility is used to manufacture Product and product for other programs of either Party, Fixed Costs shall be allocated in proportion to the use of such facility for the manufacture of Product and product for such other programs. Except as otherwise provided in this Agreement, all cost determinations made hereunder shall be made in accordance with GAAP.

     1.28 “GAAP” means the current United States generally accepted accounting principles, consistently applied.

     1.29 “IND” means an Investigational New Drug application filed with the FDA to obtain approval to conduct human clinical trials of the Product for an indication.

     1.30 “Invention” means all ideas, data, writings, inventions, discoveries, improvements and other technology, whether or not patentable or copyrightable.

     1.31 “JSC” means the Joint Steering Committee of Section 6.1.

     1.32 “Know-How” means data, information, know-how, compounds and reagents.

     1.33 “Marketing Committee” means the Marketing Committee of Section 10.1.

     1.34 “Marketing Expenses” means, with respect to Product, all costs and expenses (including salaries and benefits) incurred by the Selling Party in the Territory for marketing associated with pre-launch, launch, advertising and sales promotion (including, without limitation, expenses of patient programs such as those involving compassionate use, indigents, uninsured and underinsured, training, disease information and management, and compliance;

expenses related to promotional publications, space or time in various media, direct mail campaigns, samples, advertising agency fees and other promotion activities; phase IV studies (whether or not required by a regulatory agency)). Such expenses include allocated maintenance and depreciation costs for building space directly dedicated to the marketing of Product, but exclude costs and charges relating to unused capacity, marketing of other products, and amortization of property, plant and equipment not directly related to marketing of Product, in each case determined in accordance with GAAP. Marketing Expenses do not include Selling Expenses.

     1.35 “Marketing Plan” means the Marketing Plan of Section 10.1.

     1.36 “Net Sales” with respect to Product or Royalty Bearing Product, as the case may be, means the invoiced sales of all Product or Royalty Bearing Product, as the case may be, to Third Parties by the Selling Party, its Affiliates or a Sublicensee, less the following items as applicable to the Product or Royalty Bearing Product, as the case may be, to the extent such items are customary under industry practices: (a) credits or allowances granted upon returns, rejections or recalls, retroactive price reductions, billing corrections or allowances for bad debt; (b) freight, shipping and insurance costs to the extent separately included on the invoice; (c) quantity and other trade discounts, credits or allowances; (d) customs duties, taxes and surcharges and other governmental charges incurred in connection with the production, sale, transportation, delivery, use, exportation or importation of Product or Royalty Bearing Product, as the case may be, to the extent separately included on an invoice; (e) government mandated rebates and discount programs; and (f) Third Party rebates and charge backs or managed care organization rebates all in accordance with standard allocation procedures and accounting methods consistently applied, which methods are in accordance with GAAP.

     In the event the Product or Royalty Bearing Product, as the case may be, is sold as a component of a combination of active pharmaceutical components, the Net Sales for the purposes of determining royalty payments on such combination, shall be determined by multiplying the Net Sales of the combination by the fraction A/(A+B) where A is the average sale price of the Product or Royalty Bearing Product, as the case may be, portion of the combination when sold separately in finished form during the applicable royalty reporting period and in the country in which the sale was made, and B is the aggregate average selling price of the other pharmaceutically active components of the combination sold separately during the applicable royalty reporting period and in the country where the sale was made. In the event that no separate sale of either such above-designated Product or Royalty Bearing Product, as the case may be, or such above-designated other active pharmaceutical components of the combination is made during the applicable royalty reporting period and in the country in which the sale was made, Net Sales shall be determined by multiplying the Net Sales of the combination by the fraction C/(C+D) where C is the standard fully-absorbed cost of the Product or Royalty Bearing Product, as the case may be, portion of such combination and, D is the standard fully-absorbed cost of the other active pharmaceutical components (with such fully-absorbed cost determinations to be made in accordance with GAAP).

     In the event that a Selling Party sells Product or Royalty Bearing Product, as the case may be, to its Affiliate for resale, then Net Sales shall be calculated on the invoiced price on resale to a person or entity that is other than such Affiliate of a Party.

     1.37 “Non-Selling Party” in each country is the Party that is not the Selling Party and who is not an Opt-Out Party.

     1.38 “Opt-Out Party” has the meaning of Section 7.1.

     1.39 “Patent Rights” means United States and foreign patents, patent applications, provisional patent applications, certificates of invention, applications for certificates of invention, divisions, continuations, continuations-in-part, continuing prosecution applications, together with any extensions, registrations, confirmations, reissues, re-examinations or renewals of the above as well as supplementary protection certificates therefore, and any other form of government-issued patent protection directed to the inventions claimed in the foregoing.

     1.40 “Party” means ChemDiv or Avalon.

     1.41 “Phase I Clinical Trial” means, as to a Product, the first controlled and lawful study in humans of the safety of such Product, which is prospectively designed to generate sufficient data (if successful) to commence a Phase II Clinical Trial of such Product, as further defined in Federal Regulation 21 C.F.R. 312.21, or corresponding non-US applicable laws.

     1.42 “Phase II Clinical Trial” means, as to a Product, a controlled and lawful study in humans of the safety, dose ranging and efficacy of such Product, which is prospectively designed to generate sufficient data (if successful) to commence a Pivotal Trial of such Product, as further defined in Federal Regulation 21 C.F.R. 312.21, or corresponding non-US Applicable Laws.

     1.43 “Pivotal Trial” means a clinical trial that is of size and design agreed to by the FDA that is appropriate to establish that a pharmaceutical product is safe and effective for its intended use, to define warnings, precautions and adverse reactions that are associated with the pharmaceutical product in the dosage range to be prescribed, and to support Regulatory Approval of such pharmaceutical product or label expansion of such pharmaceutical product.

     1.44 “Plans” means individually and collectively the Development Plan and Research Plan.

     1.45 “Primary Contact Person” has the meaning set forth in Section 5.8 hereof.

     1.46 “Product” means a Development Compound and/or a Replacement Compound and/or a pharmaceutical composition that includes a Development Compound and/or Replacement Compound.

     1.47 “Product Costs” means the aggregate of all expenses of the Selling Party in accordance with GAAP (including accruals legitimately chargeable against profits) in connection with the commercialization, manufacture and distribution of Product, consisting of only the following:

          (i) Fully Absorbed Cost of Goods for Product that is sold in the Territory;

          (ii) Selling Expenses for Product in the Territory;

          (iii) Marketing Expenses for Product in the Territory;

          (iv) Distribution expenses for Product in the Territory (including freight, insurance and other monies paid to Third Parties) to the extent not deducted from Net Sales;

          (v) Royalties and other fees paid to a Third Party (including, but not limited to royalties paid to Third Parties for ChemDiv Patent Rights and Avalon Patent Rights) for Product in the Territory;

          (vi) Recall Expense for Product in the Territory;

          (vii) General and administrative costs to the extent not included in items (i) through (vi) hereof that are chargeable in an amount not to exceed twenty percent (20%) of Net Sales;

          (viii) Damages (including out-of-court settlements) and legal expenses incurred by the Selling Party with respect to a Third Party claim or action arising out of the research, development, manufacture, use, distribution, marketing or sale of Product including those incurred as result of indemnification under Article 14 and those incurred under Article 11;

          (ix) Legal expenses with respect to Product not included in 1.47(viii), including those incurred with enforcing intellectual property rights with respect to Product, but excluding those equally shared with ChemDiv under this Agreement;

          (x) Other expenses agreed to by the Parties; and

          (xi) Insurance premiums with respect to Product, including Product liability insurance.

     1.48 “Product Revenues” means any and all revenue received by the Selling Party for Product (other than Net Sales) and/or rights to Product and/or under an agreement with respect to Product (other than Net Sales), including, but not limited to, monies received pursuant to a license such as upfront fees, milestones, royalties and/or monies received for marketing rights and/or distribution rights and monies received as damages and/or in settlement of a legal action with respect to Product.

     1.49 “Project” means research activities with respect to identifying compounds with activity against an Approved Target, synthesizing compounds based on such identified compounds, identifying and selecting a Development Compound, developing, manufacturing, obtaining Regulatory Approval and commercializing a Product.

     1.50 “Recall Expense” the cost and expense for recall or market withdrawal of Product in the Territory required or requested by a governmental authority having jurisdiction there over or as a result of a decision of the Selling Party, including, but not limited to, expenses incurred for replacement of Product, all in accordance with GAAP.

     1.51 “Regulatory Approvals” means all approvals from regulatory authorities in any country or region required lawfully to develop, manufacture and market Product in any such country or region, including without limitation any Product pricing approvals where applicable.

     1.52 “Replacement Compound” means (i) a derivative or analog of a Development Compound or (ii) a Collaboration Compound, in each case that is selected to replace a Development Compound prior to the Opt-Out Date by the JSC or after the Opt-Out Date by the Selling Party.

     1.53 “Research Plan” means for each Project each research plan and amendments thereto that is approved by the JSC.

     1.54 “Research Program” means for each Project activities to identify and select a Development Compound, including screening of compounds, synthesis of compounds, and testing of compounds.

     1.55 “Revenue” means the aggregate of Net Sales and Product Revenues.

     1.56 “Royalty Bearing Product” means a Product of a Project as to which a Party has exercised Opt-Out rights under Article 7.

     1.57 “Royalty Percentage” means on a Project-by-Project basis the following percentages depending on the Opt-Out Date for the Project:

     For the avoidance of doubt the Royalty Percentage for a Project is *% until selection of a Development Compound for such Project.

     1.58 “Selected Compounds” has the meaning set forth in Section 2.1.

     1.59 “Selling Expenses” means the aggregate amount of all direct expenses and related costs such as health care and other benefits incurred for the sales force and sales force management by the Selling Party in the Territory, all in accordance with GAAP and all only as they relate to sale of Product in the Territory, including but not limited to salaries, commissions, sales incentive payments, sales training expenses, and travel expenses. Such expenses include allocated maintenance and depreciation costs for building space directly dedicated to the selling of Product, but exclude costs and charges relating to unused capacity, selling of other products, and amortization of property, plant and equipment not directly related to selling of Product, in each case determined in accordance with GAAP.

     1.60 “Selling Party” means Avalon and its Affiliates (i) unless Avalon becomes an Opt-Out Party, in which case, if ChemDiv is a Non-Selling Party, ChemDiv shall become the Selling Party, or (ii) unless Avalon and ChemDiv mutually agree in writing that ChemDiv shall be the Selling Party, in which case ChemDiv shall be the Selling Party. If each Party becomes an Opt-Out Party, neither Party shall be a Selling Party.3

     1.61 “Sublicensee” means any person or entity other than a distributor that receives from the Selling Party the right to manufacture and sell Product.

     1.62 “Target” means a protein and/or peptide and/or polynucleotide.

     1.63 “Territory” means the world.

     1.64 “Third Party” means any entity other than ChemDiv or Avalon and their respective Affiliates.

     1.65 “Valid Claim” means an issued claim of an unexpired patent, included within Collaboration Patent Rights which has not been withdrawn, canceled or disclaimed, or held permanently revoked, or held invalid or unenforceable by a court of competent jurisdiction or administrative agency in an unappealed or unappealable decision, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise.

     1.66 “Variable Costs” means the direct cost of labor, raw materials, supplies and other resources directly consumed in the conduct of the applicable activity.

ARTICLE 2

LIBRARY

     2.1 (a) ChemDiv shall provide Avalon with two hundred thousand (200,000) compounds selected by Avalon from the ChemDiv Library (individually and collectively the “Selected Compounds”). ChemDiv shall provide Avalon with structural information with respect to a reasonable number of compounds in excess of such 200,000 compounds to permit Avalon to select the Selected Compounds. The Selected Compounds shall be provided as * well plates with each well containing * micromoles of compound per well, dissolved in * microliters of DMSO, with the compound being at a final concentration of * micromoles. The Selected Compounds in such format shall be provided to Avalon within 90 days after the later of the date of the selection by Avalon or the Effective Date. Compounds may be shipped in multiple shipments and shall be invoiced by ChemDiv to Avalon on a per-shipment basis.

          (b) Avalon shall pay ChemDiv * per Selected Compound for the Selected Compounds. Avalon shall pay each invoice within thirty (30) days after receipt of the compounds covered by the invoice.

          (c) In the event that Avalon determines that one or more Selected Compounds has activity against an Approved Target, and Avalon reasonably requires additional quantities thereof for use in a Project for screening or other Project purposes, ChemDiv shall provide Avalon with up to * micromoles of each Selected Compound, dissolved in DMSO or in dry powder form, as is reasonably required for the Project without charge.

          (d) In the event that JSC determines that Selected Compounds are required in excess of the amounts to be provided under Section 2.1(c) for use in a Project, ChemDiv shall provide Avalon with such additional Selected Compounds at no charge.

          (e) In the event that Avalon desires additional Selected Compounds for use outside of a Project for screening or other research purposes, ChemDiv agrees to provide Avalon with such Selected Compounds for such use at a price no greater than that charged to other customers of ChemDiv as of such time.

     2.2 (a) Avalon shall have the right to use the Selected Compounds pursuant to a Project without any payment to ChemDiv other than those defined in Section 2.1.

          (b) Subject to Section 2.2(c), Avalon shall have the right to use the Selected Compounds for screening purposes outside of a Project without any additional payment to ChemDiv.

          (c) In the event that Avalon uses the Selected Compounds with respect to screening work performed for a Third Party, Avalon shall pay to ChemDiv * ($*) per compound per treatment of a cell line used in a screen, and Avalon shall have the right to use and to disclose to such Third Party any and all information with respect to such work performed by Avalon with respect to such Selected Compounds, including, but not limited to, structures, computational values, properties, and uses for such Third Party; provided however that Avalon shall not have

the right to grant a Third Party any rights or license in the compounds, or in any ChemDiv Patent Rights, or in any ChemDiv Know-How.

          (d) In the event that as a result of screening work performed by Avalon for a Third Party with respect to Selected Compound, such Third Party wishes to procure any Selected Compound, Avalon agrees to refer such Third Party to ChemDiv. Avalon agrees not to transfer, sell, barter, assign, or trade any Selected Compounds to or with any Third Party.

          (e) In the event that Avalon desires to out source lead optimization and/or synthesis of chemical compounds, based on selection of a Selected Compound in a screen outside of a Project, Avalon shall provide ChemDiv with the first opportunity to provide such services to Avalon with respect to * percent (*%) of such services and Avalon shall employ ChemDiv for such services provided that ChemDiv can provide such services at a price, quality and in the time period specified by Avalon. In the event that Avalon does not select ChemDiv with respect to such services, as to which ChemDiv was provided a first opportunity, Avalon shall have the right to employ a Third Party for such services provided that the price, quality and the time period as a whole are not less favorable to Avalon than those offered to Avalon by ChemDiv. Avalon’s obligations under this Section 2.2(c) shall terminate on the earlier of (i) Avalon paying ChemDiv * thousand dollars ($*) for services under this Section 2.2(c); or (ii) ChemDiv failing to cure a material breach of ChemDiv’s obligations with respect to services performed pursuant to this Section 2.2(c); or (iii) ChemDiv becoming an Opt-out Party pursuant to Section 15.2 or 15.3.

     2.3 Except for Collaboration Inventions, Avalon shall own all Inventions made by or on behalf of Avalon based on work performed with the Selected Compounds and any and all

intellectual property rights (including, but not limited to, Patent Rights) with respect to such Inventions.

ARTICLE 3

PROJECTS

     3.1 Within * days of the Effective Date, the Parties shall select * Targets from a list of Targets provided by the Parties. Subject to the rights of a Party to opt-out as provided in Article 7, the Parties agree to initiate * Projects with respect to * different Approved Targets. The first Project shall be initiated by the Parties upon the JSC selecting the first Approved Target. The Parties agree to initiate * with respect to a *, respectively, provided, however, without the consent of both Parties, * will be initiated no earlier than * after the Effective Date and * will be initiated no earlier than * after the Effective Date.

ARTICLE 4

RESEARCH

     4.1 For each Project, the Parties shall prepare a plan for the Research Program therefore, including screening against an Approved Target, synthesizing compounds based on compounds identified by such screening, testing of identified and synthesized compounds and selecting a Development Compound. Such plan shall provide that Avalon is responsible for screening activities to identify compounds with activity against an Approved Target and ChemDiv is responsible for synthesizing compounds based on compounds identified by screening. Such plan shall be submitted to the JSC for approval. Such plan in amended or unamended form as approved by the JSC shall be the Research Plan.

     4.2 Each Party shall perform the activities allocated to a Party under a Research Plan.

     4.3 Each Party shall bear the cost and expense of performing the activities allocated to a Party under a Research Plan.

     4.4 The Parties shall cooperate with each other in performing their respective obligations under a Research Plan and shall keep each other informed as to their activities and results thereof.

     4.5 ChemDiv shall supply Avalon with a specific quantity and format of each compound that is synthesized by ChemDiv pursuant to a Project, as determined by the JSC.

     4.6 The Parties shall provide the JSC with written reports with respect to activities performed under each Research Plan and each Development Plan prior to each scheduled JSC meeting which report shall cover the period between the last report and a date ten (10) days prior to the scheduled JSC meeting.

ARTICLE 5

DEVELOPMENT

     5.1 For each Project, the Selling Party shall be responsible for developing and obtaining Regulatory Approval of a Product. The Selling Party shall apply for and own all Regulatory Approvals for Product. In the event that a Selling Party opts-out of a Project under Article 7, effective as of the Opt-Out Date, the Selling Party shall transfer to the Non-Selling Party, with respect to such Project, any and all Regulatory Approvals and/or filings for Regulatory Approvals and/or other filings as part of the procedure for obtaining Regulatory Approval, at no additional cost to the Non-Selling Party.

     5.2 For each Project, the Selling Party, in consultation with the Non-Selling Party, shall prepare a rolling * year development plan for the Development Program therefore which

shall describe the development activities for the applicable Product, including without limitation pre-clinical studies, toxicology, formulation activities, scale up of production process, manufacturing development and clinical trials as appropriate for the stage of development. The development plan shall also include a summary of the estimated costs expected to be incurred under the development plan during the covered period and a description of, and budget for, all activities proposed for such period under the development plan. In addition, the development plan shall identify the number of personnel to be used by the Selling Party and, if applicable, the Non-Selling Party in performing activities in connection with the development plan, as well as activities to be performed by Third Parties. The initial rolling * development plan for each Project shall be prepared upon selection of a Development Compound therefore.

     5.3 Avalon and ChemDiv each agree that it shall cause the JSC to approve a development plan for each calendar year that includes a level of efforts, resources and monies sufficient to research, develop and manufacture Product and to seek Regulatory Approval of Product in at least the United States.

     5.4 The rolling * year development plan prepared by the Selling Party (except for the initial development plan), shall be submitted to the JSC for approval by no later than * of the calendar year preceding the * calendar years covered therein. The development plan approved by the JSC in amended or unamended form shall be the Development Plan. The Development Plan shall always be a rolling three year plan and the Development Plan shall be updated or amended at least annually by no later than * of each year preceding the year for which the update is being made. Except by mutual agreement of the Parties, all calendar year budgets are only to be updated and/or amended annually by no later than August 1 of each year preceding the year for which the update is being made.

     5.5 In a calendar year, unless approved in writing by the Parties, neither Party shall incur Development Costs that exceed * of the budget for such calendar year under a Development Plan.

     5.6 Each Party shall report to the JSC the Development Costs actually incurred by each Party in a calendar quarter within thirty (30) calendar days after the end of the applicable calendar quarter. The JSC shall determine the aggregate Development Costs for the applicable calendar quarter and determine the amount of Development Costs that should have been incurred by Avalon based on the Applicable Percentage and the Development Costs that should have been incurred by ChemDiv based on the Applicable Percentage. The JSC shall report such calculation to both Parties within ten (10) Business Days after receiving the reports thereby communicating its determination as to Development Costs owed. To the extent that a Party has incurred Development Costs in excess of the Development Costs that should have been incurred by such Party based on the Applicable Percentage, within (30) days, the other Party shall pay to such Party such excess so that each Party bears the Applicable Percentage of such aggregate Development Costs for such calendar quarter.

     5.7 Each Party shall keep and shall cause each of its Affiliates and its and their contractors to keep full and accurate records and books of account containing all particulars that may be necessary for the purpose of calculating Development Costs to be charged to the other Party pursuant to this Agreement. Such books of account shall be kept by a Party at its places of business and, with all necessary supporting data shall, for the * years next following the end of the calendar year to which each shall pertain be open for inspection by an independent certified accounting firm selected by the other Party and reasonably acceptable to the Party whose books are being inspected upon reasonable notice during normal business hours at the other Party’s

expense for the sole purpose of verifying charges in compliance with this Agreement, but in no event more than once each calendar year. All information and data offered shall be used only for the purpose of verifying charges to the inspecting Party. In the event that such inspection shall indicate that in any calendar year the charges for Development Costs were overstated by at least * percent (*), then the Party whose books are being inspected shall pay the cost of the inspection. All underpayments and overpayments revealed by such audit are immediately due and payable.

     5.8 Avalon and ChemDiv have each designated an initial primary contact person (“Primary Contact Person”) who shall be responsible for the interactions between the Parties related to this Agreement. The initial Primary Contact Persons are identified in Exhibit A hereto. The Primary Contact Persons shall attempt to promptly resolve any disputes that arise under the Research Program and/or Development Program and, if they are unable to do so, such dispute shall be referred to the JSC. Each Party may change its Primary Contact Person upon written notice to the other Party. Each Party’s Primary Contact Person may also serve as one of its representatives on the JSC. The Primary Contact Person for each Party shall designate one or more employees as appropriate to be a member of a project team, who shall meet as often as needed to coordinate the work of the Parties under the applicable Research Plan and Development Plan.

ARTICLE 6

JOINT STEERING COMMITTEE

     6.1 JSC. (a) Until the Opt-Out Date for a Project, each Project shall be managed and directed by a committee composed of four members, with Avalon appointing two (2) members and ChemDiv two (2) members (the “JSC”), with a member appointed by Avalon being

Chairman of the JSC. Avalon and ChemDiv may also appoint such non-voting ex-officio members of the JSC as each Party may deem appropriate, provided that such ex-officio member that is not an employee signs an appropriate confidentiality agreement.

          (b) The JSC shall meet at least once each calendar quarter in person or by telephone. A quorum for the conduct of business at any meeting of the JSC shall consist of at least one representative of Avalon and at least one ChemDiv representative. Each member of the JSC, excluding ex-officio members, shall have one vote, and all decisions shall be reached by a unanimous vote. The Parties shall cause the JSC to review and vote on each submitted development plan and research plan. The JSC has the authority to approve Plans.

          (c) The JSC shall review each approved Development Plan and Research Plan at least once each year or at the request of any member, and shall decide whether or not to amend the Development Plan or Research Plan, as the case may be.

          (d) If there is a tie vote in the JSC, or if the JSC is unable to resolve a dispute referred to the JSC, ChemDiv and Avalon agree to exert