Collateral Pledge And Security Agreement

Exhibit 10.37


COLLATERAL PLEDGE AND SECURITY AGREEMENT

AND

CONTROL AGREEMENT

Among

AVALON PHARMACEUTICALS, INC.,

as Pledgor,

MANUFACTURERS AND TRADERS TRUST COMPANY,

as Bank

and

ALLFIRST TRUST COMPANY NATIONAL ASSOCIATION

as Securities Intermediary

Dated as of April 1, 2003


COLLATERAL PLEDGE AND SECURITY AGREEMENT
AND CONTROL AGREEMENT

THIS COLLATERAL PLEDGE AND SECURITY AGREEMENT AND CONTROL AGREEMENT (this " Agreement" ) is dated as of April 1, 2003 and is among AVALON PHARMACEUTICALS, INC., a Delaware corporation qualified to do business in the State of Maryland (the " Pledgor" ), MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking corporation (the " Bank" ), and ALLFIRST TRUST COMPANY NATIONAL ASSOCIATION (the " Securities Intermediary" ).

RECITALS

WHEREAS, pursuant to and in accordance with the Maryland Industrial Development Financing Authority Act, Article 83A, Title 5, Subtitle 9 of the Annotated Code of Maryland, and the Maryland Economic Development Revenue Bond Act, Article 41, a714-101 et seq., of the Annotated Code of Maryland (collectively, the " Acts" ), and pursuant to a certain Trust Indenture, dated as of even date herewith (the " Indenture" ), by and between Maryland Industrial Development Financing Authority (the " Issuer" ) and Allfirst Bank National Association, as Trustee (the " Trustee" ), the Issuer has determined to issue and sell $12,000,000 in the original principal amount of its Taxable Variable Rate Demand Revenue Bonds (Avalon Pharmaceuticals, Inc. Facility) Series 2003 (the " Bonds" ) and to lend the proceeds thereof to the Pledgor under the terms and conditions of a certain Loan Agreement of even date herewith by and between the Issuer and the Pledgor (the " Loan Agreement" ) to finance a portion of the construction of certain tenant improvements and the purchase and installation of certain equipment for wet lab space and office space located at 20358 Seneca Meadows Parkway, Germantown, Maryland (collectively, the " Facility" ) as more fully described under that certain Lease, dated as of July 15, 2002, by and between the Pledgor, as tenant, and Westphalia Center II Limited Partnership, as landlord (" Lease" ).

WHEREAS, in order to enhance the marketability of the Bonds and pursuant to a Letter of Credit Agreement dated of even date herewith (the " Letter of Credit Agreement" ) between the Pledgor and the Bank, the Bank has agreed to issue to the Trustee its irrevocable transferable letter of credit in the amount of $12,197,260.00 to provide payment for and secure the payment of the principal of and interest on, and the purchase price of, the Bonds.

WHEREAS, as a condition precedent to the consummation of the transactions contemplated by the Letter of Credit Documents (as defined in the Letter of Credit Agreement), the Bank will require the Pledgor to post and maintain cash collateral and/or securities in an Account (as defined hereinafter), which Account shall be pledged to the Bank as security for the Pledgor' s Letter of Credit Obligations (as defined in the Letter of Credit Agreement) in accordance with the terms of this Agreement.

WHEREAS, pursuant to and in accordance with the MIDFA Act, Maryland Industrial Development Financing Authority, in its capacity as insurer (" MIDFA" ), is providing financial assistance by insuring through its Industrial Development Fund thirty percent (30%) of the outstanding balance of the Letter of Credit subject to a reduction in the amount insured by MIDFA to twenty-five (25%) of the outstanding balance of the Letter of Credit if a certain event


fails to occur as further described in the Insurance Agreement of even date herewith by and between MIDFA, the Bank and the Pledgor (the " Insurance Agreement" ); and

WHEREAS, in addition, the parties hereto desire to evidence their agreements and understandings related to the Account.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1
DEFINED TERMS; RULES OF CONSTRUCTION

1.1 Defined Terms . All capitalized terms used in this Agreement but not defined below or elsewhere in this Agreement shall have the same meanings assigned to them in the Letter of Credit Agreement; provided , however that unless varied by this Agreement, all terms used herein which are defined by the Uniform Commercial Code shall have the same meanings hereunder as assigned to them by the Uniform Commercial Code. As used in this Agreement, the following terms shall have the meanings set forth below:

" Account" shall have the meaning set forth in Section 2.1 (a).

" Account Agreement" shall mean the [name of account] dated [date of account] between the Pledgor and the Securities Intermediary.

" Acts" shall have the meaning set forth in the recitals hereto.

" Adjusted Market Value" shall mean, with respect to Properly Margined Cash Collateral, the sum of the Adjusted Market Value (Item) of each Permitted Investment constituting Properly Margined Cash Collateral in respect of an Account on each date such Cash Collateral is marked-to-market in accordance with this Agreement.

" Adjusted Market Value (Item)" shall mean with respect to each Permitted Investment that constitutes Cash Collateral on any date that the securities in the Account are marked-to-market, the product of the Fair Market Value of each Permitted Investment on such date multiplied by the percentage in the table set forth as Schedule 1 attached hereto and made a part hereof, under the column marked " Advance Rate to Maintain Properly Margined Cash Collateral" opposite the type of investment category into which such Permitted Investment falls.

" Agreement" shall have the meaning set forth in the introductory paragraph.

" Bank" shall have the meaning set forth in the introductory paragraph.

" Bonds" shall have the meaning set forth in the recitals hereto.

" Cash Collateral" shall have the meaning set forth in Section 2.1 hereof.

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" Cash Collateral Test Date" shall mean the last day of each calendar month or such other date on which the Bank reasonably requests the Pledgor to mark-to-market the Cash Collateral in the Account.

" Facility" shall have the meaning set forth in the recitals hereto.

" Fair Market Value" shall mean, with respect to any Cash Collateral, the closing bid price of each item of Cash Collateral on the day the Cash Collateral is marked-to-market, plus in the case of Cash Collateral issued on a coupon basis, accrued and unpaid interest and yield thereon until such date.

" Indenture" shall have the meaning set forth in the recitals hereto.

" Insurance Agreement" shall have the meaning set forth in the recitals hereto.

" Insurance Step Down" shall have the meaning set forth in Section 2.3(b)(i).

" Issuer" shall have the meaning set forth in the recitals hereto.

" Lease" shall have the meaning set forth in the recitals hereto.

" Letter of Credit Agreement" shall have the meaning set forth in the recitals hereto.

" Lien" shall mean any deed of trust, mortgage, pledge, security interest, encumbrance, lien, easement, servitude or charge of any kind, including any irrevocable license, conditional sale or other title retention agreement, any lease in the nature thereof, or any other right of or arrangement with any creditor to have its claim satisfied out of any specified property or asset with the proceeds therefrom prior to the satisfaction of the claims of the general creditors of the owner thereof, whether or not filed or recorded, or the filing of, or agreement to execute as " debtor" , any financing or continuation statement under the UCC of any jurisdiction or any federal, state or local lien imposed pursuant to applicable law.

" Loan Agreement" shall have the meaning set forth in the recitals hereto.

" MIDFA" shall have the meaning set forth in the recitals hereto.

" Minimum Required Cash Collateral Amount" shall mean Properly Margined Cash Collateral, with an Adjusted Market Value of no less than $6,700,000 which amount shall be increased and decreased in accordance with Section 2.3 hereof.

" Permitted Investments" shall mean the investments set forth on Exhibit A , attached hereto and made a part hereof, in each case payable in dollars of the United States of America and payable in the United States of America.

" Pledgor" shall have the meaning set forth in the introductory paragraph.

" Properly Margined Cash Collateral" shall mean Cash Collateral, the amount of which is determined on the basis of Properly Margined Cash Collateral Coverage.

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" Properly Margined Cash Collateral Coverage" shall mean Cash Collateral, the Fair Market Value of which is adjusted in accordance with the definition of Adjusted Market Value (Item), and maintained in accordance with the terms set forth in this Agreement.

" Securities Intermediary" shall have the meaning set forth in the introductory paragraph.

" Trustee" shall have the meaning set forth in the recitals hereto.

" Uniform Commercial Code" or " UCC" shall mean the Uniform Commercial Code in effect in the State of Maryland.

1.2 Rules of Construction .

(a) The words " hereof, " herein" , " hereunder" , " hereto" , and other words of similar import refer to this Agreement in its entirety.

(b) The terms " agree" and " agreements" contained herein are intended to include and mean " covenant" and " covenants" .

(c) References to Articles, Sections, and other subdivisions of this Agreement are to the designated Articles, Sections, and other subdivisions of this Agreement as originally executed.

(d) The headings of this Agreement are for convenience only and shall not define or limit the provisions hereof.

(e) All references made (i) in the neuter, masculine or feminine gender shall be deemed to have been made in all such genders, and (ii) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well.

SECTION 2
PLEDGE AND MAINTENANCE OF COLLATERAL

2.1 Grant of Security Interest in Cash Collateral. In order to secure its obligations under the Letter of Credit Agreement and the other Letter of Credit Documents, the Pledgor hereby unconditionally, irrevocably and presently assigns, mortgages, conveys, pledges, hypothecates and delivers to the Bank a first priority security interest in, all right, title and interest of the Pledgor in and to:

(a) Account number 80366 maintained by the Securities Intermediary in the name of Pledgor or for the benefit of Pledgor, and all successor and replacement accounts, regardless of the numbers of such accounts or the offices at which such accounts are maintained (collectively, any or all of the foregoing may be referred to herein as the " Account" ) and all rights of the Pledgor in connection with the Account, and all investment property, security entitlements, financial assets, certificated securities, uncertificated securities (including without limitation mutual funds shares), money, deposit accounts, bonds, instruments, general intangibles and all other investments or

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property of any sort now or hereafter held, maintained or administered in the Account in the name of or for the benefit of the Pledgor;

(b) All rollovers, renewals or reinvestments of any of the foregoing property;

(c) All stock or conversion rights, rights to subscribe, liquidation dividends or preferences, stock dividends, dividends, rights to interest, interest payments, dividends paid in stock, rights under hedge or derivative transactions, equity swaps, caps, floors or collars, new securities or other property which the Pledgor is or may hereafter become entitled to receive on account of or related to any of the foregoing property;

(d) All rights, claims and causes of action, if any, that the Pledgor may have against the Securities Intermediary or any other person in respect of any of the foregoing; and

(e) The proceeds (including, without limitation, insurance proceeds from the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the Securities Investor Protection Corporation or any other governmental or private insurance company) of any of the foregoing or replacements thereof or substitutions therefor (the Account and the contents and proceeds thereof and all other items (if any) described in subsections (a) through (e) being hereinafter referred to collectively as the " Cash Collateral" );

provided, however , that the Bank' s security interest in the Cash Collateral shall not exceed at any time the Minimum Required Cash Collateral Amount.

2.2 Maintenance of Minimum Required Cash Collateral Amount .

(a) The Pledgor shall maintain Cash Collateral in the Account on the basis of the Properly Margined Cash Collateral Coverage and shall deliver to the Securities Intermediary, within two (2) Business Days after demand therefor, additional Permitted Investments so that the Adjusted Market Value of the Cash Collateral held in the Account is not less than the Minimum Required Cash Collateral Amount.

(b) The Pledgor covenants that the Bank has and shall at all times continue to have a perfected first priority security interest in the Account and the Cash Collateral to the extent provided in Section 2.1 hereof. At any time the Pledgor is required to provide additional Cash Collateral to the Securities Intermediary as provided in this Agreement, the Pledgor shall pledge, free and clear of all Liens, additional Cash Collateral to the Bank and deliver such additional Cash Collateral to the Securities Intermediary to be held in the Account pursuant to documentation in form and substance satisfactory to the Bank and the Securities Intermediary providing for a valid and perfected first priority security interest in favor of the Bank. The Pledgor shall maintain at all times the Cash Collateral free and clear of all Liens other than Liens in favor of the Bank.

(c) All right, title and interest in and to the cash amounts on deposit in the Account together with any Permitted Investments from time to time made pursuant to this Agreement shall constitute part of the Cash Collateral and shall be held for the benefit of

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the Bank to the extent provided in Section 2.1 hereof, and shall not constitute payment of the Pledgor' s Letter of Credit Obligations (or any other obligations to which such funds are provided hereunder to be applied) until applied thereto as provided herein.

(d) Any income received (or loss incurred) with respect to the balance from time to time on deposit in such Account, including any interest or capital gains on Permitted Investments made with amounts on deposit in such Account, shall remain, or be deposited, in (or be deducted from) such Account to the extent necessary to maintain the Minimum Required Cash Collateral Amount. The Securities Intermediary shall not be required to reimburse any such losses or otherwise have any liability therefor except as otherwise provided in the applicable Account Agreement.

2.3 Automatic Decreases and Increases in the Minimum Required Cash Collateral Amount .

(a) Decreases on the First through Tenth Anniversaries of Closing Date. Subject to subsections (b), (c) and (d) below, the Minimum Required Cash Collateral Amount shall be automatically decreased to the amounts set forth below on each date indicated below: Minimum Required Cash Dates Collateral Amount April 1, 2004 $6,113,439 April 1, 2005 $5,813,196 April 1, 2006 $5,519,731 April 1, 2007 $4,897,838 April 1, 2008 $4,275,945 April 1, 2009 $3,422,137 April 1, 2010 $2,568,329 April 1, 2011 $1,714,521 April 1, 2012 $860,712 April 1, 2013 $6,904

(b) Increase Due to Insurance Step Down . If the Insurance Step Down (as defined below) occurs in accordance with the terms of the Insurance Agreement, the Minimum Required Cash Collateral Amount shall be automatically decreased in accordance with subsection (a) above, provided , however, that the Minimum Required Cash Collateral Amount for each year shall be increased by an amount equal to five percent (5%) of the Stated Amount.

(i) " Insurance Step Down" shall mean the reduction of the amount insured by MIDFA to twenty-five percent (25%) of the Stated Amount of the Letter of Credit in accordance with the terms of the Insurance Agreement.

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(c) No Decrease in the Event of Default . Notwithstanding the foregoing, in no event shall any decrease in the Minimum Required Cash Collateral Amount occur if an Event of Default (or any circumstance or event with the giving of notice or lapse of time, or both, would constitute an Event of Default) shall have occurred and be continuing.

(d) Increase in the Minimum Required Cash Collateral . Notwithstanding the foregoing, if, at any time or from time to time, the amount of the Authority' s insurance available under the Insurance Agreement is decreased for any payment made by the Authority under Section 3.1 of the Insurance Agreement, the Minimum Required Cash Collateral shall be automatically increased by the amount of such decrease in available insurance; provided , however , if the amount available under the Insurance Agreement is subsequently reinstated by the Authority, the Minimum Required Cash Collateral shall be decreased to the extent of such reinstatement.

2.4 Further Assurances b ...