Washington, D.C. 20549
FORM 10-Q
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ý |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________to______________
Commission File Number: 0-28298
ONYX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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94-3154463 |
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(State
or other jurisdiction of |
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(IRS Employer ID Number) |
3031 Research Drive
Richmond, California 94806
(Address of principal executive offices)
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(510) 222-9700 |
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(Registrant's telephone number including area code) |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
ý Yes o No
The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 18,510,289 as of
November 1, 2001.
ONYX PHARMACEUTICALS, INC.
INDEX
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(In thousands)
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September 30, |
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December 31, |
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2001 |
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2000 |
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(Unaudited) |
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(Note 1) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
36,075 |
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$ |
75,126 |
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Marketable securities |
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29,342 |
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6,868 |
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Receivable from related party |
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3,905 |
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2,254 |
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Other current assets |
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1,901 |
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829 |
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Total current assets |
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71,223 |
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85,077 |
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Property and equipment, net |
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3,975 |
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3,132 |
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Notes receivable from related parties |
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275 |
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322 |
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Other assets |
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1,850 |
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66 |
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$ |
77,323 |
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$ |
88,597 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
710 |
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$ |
2,056 |
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Accrued liabilities |
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1,902 |
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2,337 |
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Accrued clinical trials and related expenses |
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8,097 |
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3,109 |
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Deferred revenue |
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1,966 |
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3,183 |
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Long-term debt, current portion |
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- |
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183 |
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Total current liabilities |
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12,675 |
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10,868 |
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Long-term deferred revenue |
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181 |
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833 |
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Stockholders’ equity: |
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Common stock |
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19 |
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18 |
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Additional paid-in capital |
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167,944 |
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162,430 |
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Accumulated other comprehensive income |
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125 |
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- |
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Accumulated deficit |
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(103,621 |
) |
(85,552 |
) |
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Total stockholders’ equity |
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64,467 |
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76,896 |
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$ |
77,323 |
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$ |
88,597 |
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See accompanying notes.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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|
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2001 |
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2000 |
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2001 |
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2000 |
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||||
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Revenue: |
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Contract revenue from related parties |
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$ |
4,414 |
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$ |
4,929 |
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$ |
14,324 |
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$ |
19,599 |
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Contract and other revenue |
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50 |
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66 |
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218 |
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243 |
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Total revenue |
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4,464 |
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4,995 |
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14,542 |
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19,842 |
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Operating expenses: |
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Research and development |
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10,499 |
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7,570 |
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30,172 |
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19,940 |
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General and administrative |
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1,601 |
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1,903 |
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5,164 |
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5,563 |
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Total operating expenses |
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12,100 |
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9,473 |
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35,336 |
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25,503 |
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Loss from operations |
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(7,636 |
) |
(4,478 |
) |
(20,794 |
) |
(5,661 |
) |
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Interest income, net |
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699 |
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574 |
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2,725 |
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1,515 |
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Net loss |
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$ |
(6,937 |
) |
$ |
(3,904 |
) |
$ |
(18,069 |
) |
$ |
(4,146 |
) |
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Basic and diluted net loss per share |
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$ |
(0.37 |
) |
$ |
(0.27 |
) |
$ |
(0.99 |
) |
$ |
(0.30 |
) |
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Shares used in computing basic and diluted net loss per share |
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18,506 |
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14,399 |
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18,343 |
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14,036 |
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See accompanying notes.
CONDENSED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2001 |
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2000 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(18,069 |
) |
$ |
(4,146 |
) |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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|
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Depreciation and amortization |
|
1,209 |
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1,117 |
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Stock-based compensation |
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(116 |
) |
1,353 |
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Forgiveness of notes receivable |
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12 |
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43 |
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Changes in assets and liabilities: |
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Receivable from related party |
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(1,651 |
) |
(1,520 |
) |
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Other current assets |
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(1,084 |
) |
(461 |
) |
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Other assets |
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(1,784 |
) |
(37 |
) |
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Accounts payable |
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(1,346 |
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(579 |
) |
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Accrued liabilities |
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25 |
|
288 |
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||
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Accrued clinical trials and related expenses |
|
4,988 |
|
1,083 |
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||
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Accrued compensation |
|
(460 |
) |
(397 |
) |
||
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Deferred revenue |
|
(1,869 |
) |
(2,326 |
) |
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Net cash used in operating activities |
|
(20,145 |
) |
(5,582 |
) |
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|
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Cash flows from investing activities: |
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Purchases of short-term investments |
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(31,707 |
) |
(9,069 |
) |
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Sales and maturities of short-term investments |
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9,358 |
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3,527 |
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Capital expenditures |
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(2,052 |
) |
(1,331 |
) |
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Notes receivable from related parties |
|
47 |
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37 |
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Net cash used in investing activities |
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(24,354 |
) |
(6,836 |
) |
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|
|
|
|
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Cash flows from financing activities: |
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Payments on long-term debt |
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(183 |
) |
(1,649 |
) |
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Net proceeds from issuances of common stock, net of repurchases |
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5,631 |
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27,293 |
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Net cash provided by financing activities |
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5,448 |
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25,644 |
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Net (decrease) increase in cash and cash equivalents |
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(39,051 |
) |
13,226 |
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Cash and cash equivalents at beginning of period |
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75,126 |
|
12,671 |
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Cash and cash equivalents at end of period |
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$ |
36,075 |
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$ |
25,897 |
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See accompanying notes.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001, or for any other future operating periods.
The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the financial statements and footnotes thereto included in the Onyx Pharmaceuticals, Inc. (the "Company" or "Onyx") Annual Report on Form 10-K for the year ended December 31, 2000.
Note 2. Net Loss Per Share
Basic net loss per share and diluted net loss per share are presented in conformity with Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share,” for all periods presented. Basic net loss per share and diluted net loss per share are computed using the weighted-average number of shares of common stock outstanding during the period. Common stock equivalents have been excluded since their effect would be antidilutive.
Comprehensive income is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in stockholders’ equity that are excluded from net income (loss). Other comprehensive income includes unrealized gains and losses on the Company’s available-for-sale securities. Comprehensive loss and its components for the three-month and nine-month periods ended September 30, 2001 and 2000 are as follows (in thousands):
|
|
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Three Months Ended |
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Nine Months Ended |
|
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|
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September 30, |
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September 30, |
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||||||||
|
|
|
2001 |
|
2000 |
|
2001 |
|
2000 |
|
||||
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Net loss |
|
$ |
(6,937 |
) |
$ |
(3,904 |
) |
$ |
(18,069 |
) |
$ |
(4,146 |
) |
|
Net unrealized gain on available-for-sale securities |
|
125 |
|
- |
|
125 |
|
- |
|
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Comprehensive loss |
|
$ |
(6,812 |
) |
$ |
(3,904 |
) |
$ |
(17,944 |
) |
$ |
(4,146 |
) |
The component Accumulated other comprehensive income relates entirely to unrealized gains on available-for-sale securities and is $125,000 at September 30, 2001. There was no accumulated other comprehensive income at December 31, 2000.
On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, or SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 133, as amended, requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if so, the type of hedge transaction. The adoption of SFAS 133, as amended, did not have a material impact on the Company’s financial position or results of operations.
On June 29, 2001, the FASB approved the final standards resulting from its deliberations on the business combinations project. The FASB issued two statements in July 2001, Statement of Financial Accounting Standards No. 141, or SFAS 141, on Business Combinations and SFAS 142 on Goodwill and Other Intangible Assets. SFAS 141 became effective for any business combinations initiated after June 30, 2001 and also included the criteria for the recognition of intangible assets separately from goodwill. SFAS 142 will be effective for fiscal years beginning after December 15, 2001 and will require that goodwill not be amortized, but rather be subject to an impairment test at least annually. Separately identified and recognized intangible assets resulting from business combinations completed before July 1, 2001 that do not meet the new criteria for separate recognition of intangible assets will be subsumed into goodwill upon adoption. In addition, the useful lives of recognized intangible assets acquired in transactions completed before July 1, 2001 will be reassessed and the remaining amortization periods adjusted accordingly. The adoption of SFAS 141 did not have a material impact on the Company’s financial position or results of operations. Additionally, the adoption of SFAS 142 is not expected to have a significant impact on the Company’s financial position at transition.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, or SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, or APB 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. SFAS 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS144 retains the provisions of APB 30 for presentation of discontinued operations in the income statement, but broadens the presentation to include a component of an entity. SFAS 144 is effective for fiscal years beginning after December 15, 2001 and the interim periods within. The Company does not believe that the adoption of SFAS 144 will have a material impact on the Company's financial position or results of operations.
On January 29, 2001, the Company entered into a process development and manufacturing agreement with XOMA (US) LLC. Under the terms of the agreement, XOMA will develop a large-scale manufacturing process and will manufacture ONYX-015 for clinical trials and commercial production. Terms of the agreement included an initial payment of $2.0 million, payments for development work and material produced, and payments upon achieving key milestones. The initial payment, which was made in February 2001, was deferred and is being amortized over five years.
On March 8, 2001, the Company issued and sold 460,872 shares of its common stock at a purchase price of $10.849 per share as the second of two stock issuances in connection with the October 1999 collaboration agreement with Warner-Lambert Company, a wholly-owned subsidiary of Pfizer Inc. The Company received aggregate proceeds of $5.0 million.
Note 7. Collaborative Agreements
On August 8, 2001, Onyx and Warner-Lambert amended their collaboration agreement for the development and commercialization of ONYX-015. The Company regained full rights to develop and commercialize ONYX-015 for cancers that are treated via direct injections to the tumors and other local and regional routes of administration. The Company will fund all costs associated with the development and commercialization of ONYX-015 and will retain all profit derived from worldwide sales of ONYX-015 in these indications, subject to the potential re-establishment of the original collaboration agreement. Warner-Lambert will retain development rights for ONYX-015 for cancers where the drug is administered intravenously. The parties have discontinued the clinical trials of ONYX-015 administered intravenously, and the Company will utilize all available drug supply for the Phase III clinical trial in recurrent head and neck cancer as well as other clinical trials involving local or regional administration. Once adequate drug supply for the intravenous trials is available, Warner-Lambert will have the option to pursue the development and regulatory approval of ONYX-015 for intravenous administration at its own cost. If Warner-Lambert exercises its option and if ONYX-015 receives marketing approval for intravenous administration in the United States, Onyx and Warner-Lambert will re-establish the collaboration under the terms of the original collaboration agreement for all indications. At that time, the Company and Warner-Lambert will co-promote ONYX-015 in the United States and Canada and will share equally in any resulting profits. Onyx and Warner-Lambert will continue their collaboration under the research, development and commercialization agreement for two additional virus products, including a prodrug armed virus and a cytokine armed virus.
Concurrent with the amendment of the ONYX-015 collaboration, Onyx and Warner-Lambert amended their existing agreements in the field of inflammation and cell cycle control to define more precisely the fields of activity and modify license agreements under those arrangements.
Note 8. Subsequent Events
On October 30, 2001, the Company announced a plan to reduce staff and expenditures. The Company will reduce the size of its workforce, primarily impacting the research and administrative functions, by approximately 30 percent in addition to implementing various cost-saving measures in all areas of the company.
On November 6, 2001, the Company announced that it will sell and license to Syrrx Inc. (“Syrrx”) assets from the Company’s small molecules discovery program, including drug targets, related reagents and assays and compound libraries. In return, the Company will receive shares of the Series D Preferred Stock of Syrrx, future milestone payments and royalties on pharmaceutical products resulting from these assets.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward–looking statements that involve risks and uncertainties. When used herein, the words “may,” “will,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “predicts,” “potential,” “believe,” “should” and similar expressions are intended to identify such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Business Risks.”
We are engaged in the discovery and development of novel cancer therapies. Based on our proprietary virus technologies, we are developing our lead product, ONYX-015. ONYX-015 is currently in a Phase III clinical trial for recurrent head and neck cancer. In collaboration with Bayer Corporation, we are conducting a Phase I clinical trial of a raf kinase inhibitor (BAY 43-9006) in patients with cancer. Further, we are conducting research and development programs based on our virus technologies.
In August 2001, Onyx and Warner-Lambert amended their collaboration agreement for the development and commercialization of ONYX-015. We regained full rights to develop and commercialize ONYX-015 for head and neck cancer and other cancers that are treated via direct injections to the tumors and other local and regional routes of administration. We will fund all costs associated with these efforts and will retain all profit derived from worldwide sales of ONYX-015 in these indications, subject to the potential re-establishment of the original collaboration agreement. Warner-Lambert will retain development rights for ONYX-015 for cancers where the drug is administered intravenously. The parties have discontinued the clinical trials for ONYX-015 administered intravenously, and Onyx will utilize all available drug supply for the Phase III clinical trial in recurrent head and neck cancer as well as other clinical trials involving local or regional administration. Once adequate drug supply for the intravenous trials is available, Warner-Lambert will have the option to pursue the development and regulatory approval of ONYX-015 for intravenous administration at its own cost. If Warner-Lambert does not exercise its option to reinitiate clinical trials for intravenous administration, we may attempt to establish one or more collaborative relationships for the development of ONYX-015. If Warner-Lambert exercises its option and if ONYX-015 receives marketing approval for intravenous administration in the United States, Onyx and Warner-Lambert will re-establish the collaboration under the terms of the original collaboration agreement for all indications. At that time, Onyx and Warner-Lambert will co-promote ONYX-015 in the United States and Canada and will share equally in any resulting profits. Onyx and Warner-Lambert will continue the collaboration for the research and development of two additional virus products, including a prodrug armed virus and a cytokine armed virus. Based on the amendment to the collaboration agreement with Warner-Lambert for the development and commercialization of ONYX-015, we will substantially increase our self-funded research and development expenses in future periods to cover the development of ONYX-015.
In October 2001, we announced a plan to reduce staff and expenditures while providing the highest priority to products in development. Specifically, we will focus our future spending on: (1) the development of ONYX-015 in order to expedite the product’s time to market; (2) the development of BAY 43-9006 in collaboration with Bayer; and (3) the selection of the next development product candidate from our novel oncolytic virus platform. To manage our quarterly burn rate, we will reduce the size of our workforce by approximately 30 percent in addition to implementing various cost-saving measures in all areas of the company. The reduction in staffing primarily impacted the research and administrative functions. We will continue to build staff in development functions to ensure the continued development of ONYX-015 and BAY 43-9006. Key hires will continue to be made in clinical development and manufacturing. In research, ONYX will focus on: (a) research and development of the next oncolytic product candidate; (b) the research collaboration with Warner-Lambert on Armed Therapeutic Virusä products; and (c) potential collaborative relationships to support the continuation of our research programs to generate novel product candidates from the replicating virus technology platform.
In November 2001, we announced that we will sell and license to Syrrx Inc. assets from our small molecules discovery program, including drug targets, related reagents and assays and compound libraries. In return, we will receive shares of the Series D Preferred Stock of Syrrx, future milestone payments and royalties on pharmaceutical products resulting from these assets.
We have not been profitable since inception and expect to incur substantial and increasing losses for the foreseeable future, primarily due to expenses associated with the expansion of our self-funded virus research and development programs, including the development and commercialization of ONYX-015 in local/regional indications. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. As of September 30, 2001, our accumulated deficit was approximately $103.6 million.
Our business is subject to significant risks, including the risks inherent in our research and development efforts, the results of the ONYX-015 and BAY 43-9006 clinical trials, our dependence on collaborative parties, uncertainties associated with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and competition from other products. We do not expect to generate revenues from the sale of proposed products in the foreseeable future. We expect that all of our revenues in the foreseeable future will be generated from collaboration agreements.
Results of Operations
Three and nine months ended September 30, 2001 and 2000.
Revenues
Our revenues decreased 11 percent to $4.5 million for the three months ended September 30, 2001 and 27 percent to $14.5 million for the nine months ended September 30, 2001 as compared to the same periods in 2000. Revenues were $5.0 million for the three months ended September 30, 2000 and $19.8 million for the nine months ended September 30, 2000. Revenues for the three and nine months ended September 30, 2001 and the same periods in 2000 were primarily attributable to amounts earned for research performed under our collaborations with Warner-Lambert. Total revenue for the nine months ended September 30, 2000 also included a $3.7 million payment received upon the completion of a research milestone related to our agreement with Warner-Lambert for the armed virus collaboration. Based on the amendment to the collaboration agreement with Warner-Lambert for the development and commercialization of ONYX-015 that was announced in August 2001, our revenues under that agreement will be limited to research funding until clinical trials for intravenous indications are reinitiated.
Effective August 31, 2001, the research and development collaboration agreements with Warner-Lambert for the cell cycle and inflammation programs concluded and we will recognize no further revenue. Warner-Lambert may develop products identified during the research terms of these agreements, and Onyx could receive milestone payments on development and registration of any resulting products and royalties on worldwide sales of these marketed products.
Research and Development Expenses
Research and development expenses increased 39 percent to $10.5 million for the three months ended September 30, 2001 and 51 percent to $30.2 million for the nine months ended September 30, 2001 as compared with $7.6 million and $19.9 million for the same periods in 2000. The increase in research and development expenses for the three and nine months ended September 30, 2001 as compared to the same periods in 2000 was primarily due to the development costs for ONYX-015, including process development and manufacturing expenses incurred under the agreement signed with XOMA (US) LLC in January 2001. We also had increased clinical trial expenses related to our collaboration with Bayer for the Phase I clinical trial of BAY 43-9006 that was initiated in July 2000, which contributed to the increase in research and development expenses for the three and nine months ended September 30, 2001. We are currently co-funding 50 percent of clinical development costs. Based on the amendment to the collaboration agreement with Warner-Lambert for the development and commercialization of ONYX-015 that was announced in August 2001, we will substantially increase our self-funded research and development expenses in future periods to cover the development of ONYX-015. If Warner-Lambert does not exercise its option to develop and commercialize ONYX-015 for intravenous administration, we may seek new collaborators for ONYX-015; however, we may not be successful in entering into a collaborative arrangement to cover these research and development expenses. Even if we enter into a collaborative agreement, it may not be on terms favorable to us.
General and Administrative Expenses
General and administrative expenses decreased 16 percent to $1.6 million for the three months ended September 30, 2001 and decreased seven percent to $5.2 million for the nine months ended September 30, 2001 as compared with $1.9 million and $5.6 million for the same periods in 2000. The decrease in general and administrative expenses for the three and nine months ended September 30, 2001 as compared to the same periods in 2000 was primarily due to a decrease in consulting expenses. We expect general and administrative expenses to decrease in future periods as a result of the staff reductions announced in October 2001.
Net Interest Income
We had net interest income of $0.7 million for the three months ended September 30, 2001 and $2.7 million for the nine months ended September 30, 2001 as compared with $0.6 million and $1.5 million for the same periods in 2000. The increase in net interest income was principally due to increased cash and investment balances from the $48.1 million follow-on public offering of common stock in October 2000 and the $5.0 million common stock issuance to Warner-Lambert in March 2001, resulting in more interest income for the current period.
Liquidity and Capital Resources
Since our inception, our cash expenditures have substantially exceeded our revenues, and we have relied primarily on the proceeds from the sale of equity securities and revenues from collaborative research and development agreements to fund our operations.
At September 30, 2001, we had cash, cash equivalents and marketable securities of $65.4 million compared with $82.0 million at December 31, 2000. The decrease in cash and marketable securities of $16.6 million at September 30, 2001, compared with December 31, 2000, is due to cash used in operations of $20.1 million and capital expenditures of $2.1 million offset by the sale of our common stock to Warner-Lambert in March 2001, which raised $5.0 million.
Total capital expenditures for equipment and leasehold improvements for the nine-month period ended September 30, 2001, were $2.1 million. We currently expect to make expenditures for capital equipment of approximately $0.5 million for the remainder of 2001.
We believe that our existing capital resources and interest thereon including the $5.0 million received from Warner-Lambert in March 2001 and anticipated revenues from existing collaborations along with cost savings from the reduction in force announced in October 2001 will be sufficient to fund our current and planned operations through at least 2002. Changes in our research and development plans, revenues from collaborators or other changes affecting our operating expenses may result in the expenditure of these resources before the end of 2002, and in any event, we will need to raise substantial additional capital to fund our operations in future periods. We intend to seek this additional funding through collaborations, public and private equity or debt financings, capital lease transactions or other financing sources. Additional financing may not be available on acceptable terms, if at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or to obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop on our own.
Business Risks
If we are not able to demonstrate the effectiveness of ONYX-015 in our clinical trials or if our clinical trials are delayed, we may be unable to commercialize ONYX-015.
We have completed Phase II clinical trials designed to obtain safety and effectiveness trend information for ONYX-015 for the treatment of head and neck cancer, both as a single agent and in combination with chemotherapy. Based on data from these Phase II clinical trials, we are conducting a Phase III clinical trial designed to obtain effectiveness information for ONYX-015 for the treatment of recurrent disease. Historically, many companies have failed to demonstrate the effectiveness of pharmaceutical products in Phase III clinical trials notwithstanding favorable results in Phase II clinical trials. We may fail to demonstrate desired effectiveness levels in our Phase III clinical trial of ONYX-015. In addition, we may observe previously unforeseen side effects. We may fail to extend the findings of previous clinical trials in our Phase III clinical trial of ONYX-015, including similar tumor response rates, duration of tumor response or safety.
The process of obtaining Food and Drug Administration, or FDA, and other required regulatory approvals, including foreign approvals, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. We have had only limited experience in filing and pursuing applications necessary to gain regulatory approvals. The FDA may not accept the results of our Phase III clinical trial, or accept as sufficient for market approval other elements of the application that we may file for ONYX-015. The FDA may require changes in our current trials or may require additional clinical trials, which may be extensive, expensive and time-consuming. We cannot market ONYX-015 unless we receive regulatory approval.
In addition, in our clinical trials we treat patients who have failed conventional treatments and who are in advanced stages of cancer. During the course of treatment, these patients may die or suffer adverse medical effects for reasons that may be unrelated to ONYX-015. These adverse effects may impact the interpretation of clinical trial results.
We may fail to demonstrate that ONYX-015 is effective for the treatment of other types of cancer even if ONYX-015 is proven effective for the treatment of head and neck cancer.
We are initially developing ONYX-015 for treatment of head and neck cancer, using direct injection into the tumor, or intratumoral injection. Even if we are successful in developing ONYX-015 for this type of cancer, we may not demonstrate that ONYX-015 is effective in the treatment of a broader array of cancer types. We have conducted a Phase I/II clinical trial for treatment of liver metastases of colorectal cancer with ONYX-015 administered through intrahepatic artery infusion. The Phase I/II clinical trial in liver metastases of colorectal cancer is based on a small number of patients, and we may not reproduce the results from these clinical trials in future clinical trials with additional patients. In addition, we may not succeed in our efforts to deliver ONYX-015 to tumors through routes other than intratumoral injection. If we are not successful in developing additional routes of administration for ONYX-015, or establishing its effectiveness in a broad range of cancer types, ONYX-015 may not have a broad commercial use.
We do not have manufacturing expertise or capabilities and are dependent on third parties to fulfill our manufacturing needs, which could result in the delay of clinical trials or regulatory approval.
We lack the resources, experience and capabilities to manufacture our products on our own. We would require substantial funds to establish these capabilities. Consequently, we are dependent on third parties, including collaborative parties and contract manufacturers, to manufacture our products and product candidates. These parties may encounter difficulties in production scale-up, including problems involving production yields, quality control and quality assurance and shortage of qualified personnel. These third parties may not perform as agreed or may not continue to manufacture our products for the time required by us to successfully market our products. These third parties may fail to deliver the required quantities of our products or product candidates on a timely basis and at commercially reasonable prices. Failure by these third parties could delay our clinical trials and our applications for regulatory approval. If these third parties do not adequately perform, we may be forced to incur additional expenses to pay for the manufacture of our products or to develop our own manufacturing capabilities.
We currently rely on a sole source or limited number of sources for the manufacturing of ONYX-015, and if these sources are unable or unwilling to deliver the required quantities, we may not be able to find replacement manufacturers, which could result in a delay in clinical trials or in regulatory approval.
We currently rely on a sole source contract manufacturer for the supply of ONYX-015 for our Phase III clinical trial. We are aware of only a limited number of manufacturers who we believe would have the ability and capacity to manufacture this product or any other therapeutic viruses we may develop. Our contract manufacturer has produced multiple batches of material for our Phase III clinical trial, however, our contract manufacturer has experienced production problems resulting in failed batches. We may need to modify the current process to increase the yield. In addition, we have held up final release of some of the batches until the manufacturer completes documentation that complies with our manufacturing standards. As a result, we have limited the number of clinical trial sites that are enrolling patients including sites in the Phase III clinical trial. Ten clinical sites for the Phase III trial have been initiated, and six are open for enrollment. We will continue to limit the number of clinical sites that are enrolling patients for the Phase III clinical trial until product release is occurring on a routine basis.
Our current sole source contract manufacturer of ONYX-015 has experienced production difficulties, limiting our supply of product for clinical trials. If our current manufacturer is unable or unwilling to deliver the required quantities of ONYX-015 on a regular basis or terminates our relationship, we will have to rely on XOMA to manufacture ONYX-015. We do not expect XOMA to begin supplying us with ONYX-015 before the first quarter of 2002. This could delay our clinical trials and our applications for regulatory approval with the FDA. If XOMA fails to supply us with sufficient materials, we may be forced to incur additional expenses to pay for the manufacture of materials using a replacement contract manufacturer, if we can find a replacement manufacturer, or to develop our own manufacturing capabilities which may not occur within a reasonable amount of time or at commercially reasonable rates.
No one has manufactured replicating human viruses on a large scale; if we are unable to develop an effective process to manufacture ONYX-015 on a large scale, our clinical trials and regulatory approval would be delayed.
To date, our contract manufacturers have produced ONYX-015 using small-scale processes. No one has produced replicating human viruses using a commercial-scale manufacturing process. We have developed a process that we believe will be scaleable; however, we and our contract manufacturer for our Phase III clinical trial have experienced production problems using this process that have resulted in failed batches. We may need to make additional process changes and operational changes to make the manufacturing process more reliable and to make the process easier for us to develop into a larger commercial-scale manufacturing process. If we are unable to improve the large scale manufacturing process, we may not increase the number of clinical trials for ONYX-015 and the number of sites enrolling patients. If we are unable to expand the number of clinical trials, clinical sites enrolling patients and patients receiving ONYX-015, the results from our clinical trials, in particular our Phase III clinical trial, will be delayed and we will not receive regulatory approval without the results from these trials.
XOMA may not be able to produce commercial quantities of ONYX-015, which could delay regulatory approval.
To obtain regulatory approval for ONYX-015, we will need to treat a percentage of the patients in our Phase III clinical trial using ONYX-015 produced from the same manufacturing process and in the same manufacturing facility that we intend to use following FDA approval. We have recently executed a process development and manufacturing agreement with XOMA to modify the process and to produce large quantities of ONYX-015.
We will need to modify the manufacturing process to produce large quantities of ONYX-015 and to lower the cost by improving the efficiency of the process. To modify the manufacturing process and to meet our quality standards for ONYX-015, in conjunction with XOMA, we will need to spend a significant amount of time and capital and complete a substantial amount of experimentation. In conjunction with XOMA, we will need to expand and modify existing manufacturing facilities to produce commercial quantities of ONYX-015. XOMA has not manufactured large-scale viral products in the past and, together with us, may not successfully establish a commercially feasible manufacturing process.
In addition, XOMA may terminate our process development and manufacturing agreement with us for any reason by providing notice 48 months in advance.
If we do not treat patients in our Phase III clinical trial with product from the process manufactured at the new facility, the FDA will most likely require a bridging study to show that the ONYX-015 produced from the new process is comparable to ONYX-015 produced from our existing manufacturing process at our contract manufacturer’s existing facility. Filing of our applications for regulatory approval may be delayed if we:
• encounter difficulties in modifying the manufacturing process;
• fail to treat patients in our Phase III clinical trial with product from the new manufacturing process; or
• fail to conduct a bridging study prior to FDA review of our Phase III clinical trial.
We are dependent upon collaborative relationships to develop, manufacture and commercialize our products and to obtain regulatory approval, which could delay the development and commercialization of our products.
Our strategy for developing, manufacturing and commercializing our products and obtaining regulatory approval depends in large part upon maintaining and entering into collaborative agreements with pharmaceutical companies or other collaborators. We have entered into a number of collaborative agreements with different parties, including research, development and marketing agreements with Warner-Lambert and Bayer. We and Warner-Lambert recently amended our collaborative agreements to give us the full rights to develop and commercialize ONYX-015 for cancers treated via local or regional administration and to give us the responsibility for the clinical development, regulatory approval and commercialization of ONYX-015 for those indications. Warner-Lambert retained an option for development rights of ONYX-015 administered in patients intravenously.
We are subject to a number of risks associated with our dependence upon collaborative relationships, including:
• the amount and timing of expenditure of resources can vary because of collaborator decisions;
• business combinations and changes in a collaborator’s business strategy may adversely affect the party’s willingness or ability to complete its obligations under the collaboration agreement with us;
• the right of the collaborator to terminate its collaboration agreement with us on limited notice and for reasons outside our control;
• loss of significant rights to our collaborative parties if we fail to meet our obligations under these agreements;
• disagreements as to ownership of clinical trial results or regulatory approvals, and the refusal of the FDA to recognize us as holding the regulatory approvals necessary to commercialize our products;
• withdrawal of support by a collaborator following the development or acquisition by the collaborator of competing products; and
• disagreements with a collaborator regarding the collaboration agreement or ownership of proprietary rights.
Due to these factors and other possible disagreements with collaborators, we could suffer delays in the research, development or commercialization of our products or we may become involved in litigation or arbitration, which would be time consuming and expensive.
Warner-Lambert may not exercise its option to continue development of ONYX-015 administered intravenously.
We recently amended our collaborative agreements with Warner-Lambert and received full rights to develop ONYX-015 administered regionally or locally. Consequently, we now have the responsibility for the clinical development, regulatory approval and commercialization of ONYX-015 administered locally and regionally. Warner-Lambert is focused on commercializing ONYX-015 for indications where ONYX-015 is administered intravenously to treat tumors systemically over indications where ONYX-015 is administered locally or regionally, such as intratumoral injections or intrahepatic artery infusions. As part of this amendment, we granted Warner-Lambert an option to develop ONYX-015 administered intravenously under the terms of the original collaborative agreement once we have sufficient drug supply available from large-scale production processes.
Warner-Lambert may choose not to exercise its option to develop ONYX-015 administered intravenously under the terms of the original collaborative agreement. Even if Warner-Lambert chooses to exercise its option, the clinical trials with patients who receive ONYX-015 intravenously may not generate sufficient evidence of anti-tumor activity for Warner-Lambert to continue the collaboration.
If Warner-Lambert chooses not to exercise its rights to develop ONYX-015 intravenously or discontinues the collaboration, we would be solely responsible for the cost of clinical trials for intravenous administration. In addition, we would not have access to Warner-Lambert’s sales and marketing capabilities and expertise to commercialize ONYX-015 as provided in the agreement. Further, if Warner-Lambert does not exercise this option, we would attempt to establish one or more collaborative relationships for the development of ONYX-015. We cannot assure you that we will enter into any collaborative arrangements, or if we do, that these arrangements will be on terms favorable to us.
Chiron may have preferential rights to establish collaborations with us, which may complicate our future collaborative arrangements.
We were established in April 1992 by means of a transfer from Chiron Corporation to us of the drug discovery program conducted at Chiron by Dr. Frank McCormick, our scientific founder, and his research team. Under the agreement executed at that time, we granted Chiron preferential rights to receive product licenses in the fields of diagnostics and vaccines, and also established a mechanism for our making proposals to Chiron for future collaborations. Chiron has advised us that it believes this mechanism requires us to offer gene therapy programs to Chiron before licensing any of these programs to a third party. We and Chiron have different interpretations of this agreement as it relates to the scope of Chiron’s rights. We executed our agreement with Warner-Lambert for the development of ONYX-015 and two other virus products pursuant to a waiver letter from Chiron. If Chiron does not grant us further waivers and asserts rights under the April 1992 agreement, or if disputes arise, we may encounter difficulties or delays in entering into future collaborations for other product candidates.
We do not fully understand the biological characteristics of our therapeutic viruses, and their interactions with other drugs and the human immune and other defense systems, which may cause us to fail to demonstrate the safety and effectiveness of our products in clinical trials.
Therapeutic viruses are novel and we are still determining the biological characteristics of these viruses. For example, in our clinical trials to date, we have achieved the best results when ONYX-015 is used in combination with standard chemotherapy drugs, but we are uncertain as to the reasons for and the nature of the interaction of the virus with these drugs. In addition, we are still investigating the response of the human immune system to our therapeutic viruses, and the immune system may play a role in limiting the tumor-killing effect of our therapeutic viruses. We also do not know the extent the human body may clear our therapeutic viruses from circulation in the bloodstream and limit the tumor-killing activity of our therapeutic viruses. Further, we are uncertain as to whether the killing activity of ONYX-015 is specific to cells having the abnormal function involving the p53 gene. Moreover, we do not understand all of the many factors that contribute to the formation of each individual patient’s cancer. These factors include not only the cancer type, but also the pressures within the tumor and the presence of normal cells and fibrous tissue within the tumor. These factors make each tumor unique. Because of the variety of factors, some cancer patients respond to a particular type of cancer therapy while others do not, even among patients with the same cancer type. The novelty and scientific uncertainties regarding our therapeutic viruses and the uniqueness of human cancers from patient-to-patient increase the risk that we will not successfully develop our product candidates or prove their safety and effectiveness in clinical trials. Even if we succeed in developing our product candidates, our product candidates may not have a therapeutic effect in a broad patient population.
Even if our products are approved, the market may not accept our products.
Even if our product development efforts are successful and even if the requisite regulatory approvals are obtained, our products may not gain market acceptance among physicians, patients, healthcare payers and the medical community. A number of additional factors may limit the market acceptance of products including the following:
• rate of adoption by healthcare practitioners;
• types of cancer for which the product is approved;
• rate of the products’ acceptance by the target population;
• timing of market entry relative to competitive products;
• availability of alternative therapies;
• price of our product relative to alternative therapies;
• availability of third-party reimbursement;
• extent of marketing efforts by us and third-party distributors or agents retained by us; and
• side effects or unfavorable publicity concerning our products or similar products.
If any of our products do not achieve market acceptance, we may lose our investment in that product which may cause our stock price to decline.
We do not have marketing or sales experience or capabilities and are dependent on the efforts of others, which could limit our ability to commercialize our products.
We intend to enter into agreements with third parties to market and sell most of our products if we receive regulatory approval for a product, including ONYX-015 for local or regional administration. We may not be able to enter into marketing and sales agreements with others on acceptable terms, if at all. To the extent that we enter into marketing and sales agreements with other companies, our revenues, if any, will depend on the efforts of others. We also have the right under our collaboration agreements to co-promote our products in conjunction with our collaborators. If we are unable to enter into third-party agreements or if we are exercising our rights to co-promote a product, then we will be required to develop marketing and sales capabilities. We may not successfully establish marketing and sales capabilities or have sufficient resources to do so. If we do not develop marketing and sales capabilities, we may not meet our co-promotion obligations under our collaboration agreements, which could result in our losing these co-promotion rights. If we do develop such capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations and we will incur additional expenses.
Adverse events in the field of viral gene therapy may negatively affect regulatory approval or public perception of our products, which could delay our clinical trials.
We depend in part on public acceptance of the use of viruses as therapeutics or as delivery vehicles for gene therapy for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that these therapies are unsafe, and these therapies may not gain acceptance by the public or the media. As a result of negative public reaction to these therapies, the FDA may impose greater regulation, stricter clinical trial oversight and stricter commercial product labeling requirements.
The media has widely publicized the recent death of a patient at the University of Pennsylvania undergoing viral gene therapy. As a result of this death, the United States Senate held hearings to determine whether additional legislation is required to protect volunteers and patients who participate in gene therapy clinical trials. The Recombinant DNA Advisory Committee, which acts as an advisory body to the National Institutes of Health, has extensively discussed gene therapy clinical trials. This death and any other adverse events in the field of gene therapy that may occur in the future may result in greater governmental regulation of our product candidates and potential regulatory delays relating to the testing or approval of our product candidates.
Adverse regulatory rulings against our competitors could negatively affect public perception of our products, which could delay our clinical trials.
We depend on the support and enthusiasm of clinical sites, doctors and patients. Attitudes may be affected by the FDA failure of drug candidates treating a similar disease or utilizing a similar means of delivery. One of our competitors, Matrix Pharmaceuticals, Inc., is also working on a drug system to provide head and neck tumor control through direct injections. The Oncologic Drugs Advisory Committee of the FDA, or ODAC, recently voted unanimously that, based on a standard approval scenario, Matrix had not demonstrated substantial evidence that its product, IntradoseÒ Injectable Gel, is safe and effective in the treatment of symptomatic recurrent head and neck cancer. ODAC also made an initial recommendation against marketing approval of Matrix’s product. Following this initial recommendation, Matrix announced receipt of a non-approvable letter for its product from the FDA. Public perception of both the efficacy of our product and the likelihood of regulatory approval for our product could be negatively impacted by the ODAC ruling, the FDA non-approvable letter and other adverse events. Such a change in public perception could affect our ability to raise capital, to attract key personnel and to enter into arrangements with test centers to conduct clinical trials of ONYX-015 for intratumoral injection in head and neck cancer.
We have a history of losses, and we expect to continue to incur losses
As of September 30, 2001, we had an accumulated deficit of approximately $103.6 million. We have incurred these losses principally from costs incurred in our research and development programs and from our general and administrative costs. We have derived no significant revenues from product sales or royalties. We expect our research and development expenses to increase dramatically as we take primary responsibility for the clinical development of ONYX-015. We expect our quarterly burn rate to increase in 2002 by approximately 50 percent compared to the current quarterly level. We also expect to incur significant and increasing operating losses over the next several years as we expand our research and development efforts, preclinical testing and clinical trial and manufacturing activities, including the 2001 manufacturing contract with XOMA, and as our revenues from Warner-Lambert under our collaborations decrease. We expect that the amount of operating losses will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the establishment or termination of collaborations, the timing and amount of collaboration payments under the terms of our collaborative agreements, or the initiation, success or failure of clinical trials.
We do not expect to generate revenues from the sale of products for the foreseeable future. We expect that substantially all of our revenues for the foreseeable future will result from payments under our collaborative agreements. Revenues that we receive from Warner-Lambert have decreased due to the recent amendment of our collaborative agreements with Warner-Lambert. Our ability to achieve profitability depends upon our success in completing development of our potential products, obtaining required regulatory approvals and manufacturing and marketing our products.
We will need substantial additional funds, and our future access to capital is uncertain.
We will require substantial additional funds to conduct the costly and time-consuming research, preclinical testing and clinical trials necessary to develop our technology and proposed products, and to establish or maintain relationships with collaborative parties. In particular, our need for additional funds has increased and accelerated following the amendment of our collaboration agreement with Warner-Lambert, our increased burn rate and our entering into a manufacturing agreement with XOMA. Our future capital requirements will depend upon a number of factors, including:
• continued scientific progress in the research and development of our technology programs;
• the size and complexity of these programs;
• our ability to establish and maintain collaboration agreements;
• our ability to manufacture sufficient drug supply for complete clinical trials;
• progress with preclinical testing and clinical trials;
• the time and costs involved in obtaining regulatory approvals;
• the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
• competing technological and market developments; and
• product commercialization activities.
We may not be able to raise additional financing on favorable terms, or at all. If we are unable to obtain additional funds, we may delay or terminate clinical trials, curtail operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or potential markets or grant licenses that are unfavorable to us.
If we lose our key employees and consultants or are unable to attract or retain qualified personnel, our business could suffer.
The loss of the services of one or more of our key employees could have an adverse impact on our business. We do not maintain key person life insurance on any of our officers, employees or consultants, other than for our chief executive officer. We depend on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We face competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, and other research institutions. Because of the scientific nature of our business, we are highly dependent on principal members of our scientific and management staff. To pursue our product development plans, we will need to hire additional management personnel and additional qualified scientific personnel to perform research and development, as well as personnel with expertise in clinical testing, government regulation and manufacturing. We may not be successful in hiring or retaining qualified personnel. In October 2001, to conserve cash we announced a plan to reduce the size of our workforce by approximately 30 percent in order to continue to make progress with our clinical product candidates. We may be unable to recruit and retain personnel as a result of this staff reduction.
We face intense competition and rapid technological change, and many of our competitors have substantially greater managerial resources than we have.
We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and market products that will compete with other products and therapies that currently exist or are being developed. Many other companies are actively seeking to develop products that have disease targets similar to those we are pursuing. Some of these competitive products are in clinical trials. If approved, the products of these and other competitors now in clinical trials will compete directly with ONYX-015. Other companies are developing drugs targeting other abnormal functions in cancer cells that may compete with our other product candidates.
Many of our competitors, either alone or together with collaborators, have substantially greater financial resources and larger research and development staffs than we do. In addition, many of these competitors, either alone or together with their collaborators, have significantly greater experience than we do in:
• developing products;
• undertaking preclinical testing and human clinical trials;
• obtaining FDA and other regulatory approvals of products; and
• manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing products before we do. If we commence commercial product sales, we will compete against companies with greater marketing and manufacturing capabilities, areas in which we have limited or no experience.
We also face, and will continue to face, competition from academic institutions, government agencies and research institutions. Further, we face numerous competitors working on products to treat each of the diseases for which we are seeking to develop therapeutic products. In addition, our product candidates compete with existing therapies that have long histories of safe and effective use. We may also face competition from other drug development technologies and methods of preventing or reducing the incidence of disease and other classes of therapeutic agents.
Developments by competitors may render our product candidates or technologies obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborations with pharmaceutical and biotechnology companies for establishing relationships with academic and research institutions, and for licenses to proprietary technology. These competitors, either alone or with collaborative parties, may succeed with technologies or products that are more effective than ours.
We anticipate that we will face increased competition in the future as new companies enter our markets and as scientific developments surrounding other cancer therapies continue to accelerate. If our products receive regulatory approval but cannot compete effectively in the marketplace, our business would suffer.
We are subject to extensive government regulation, which can be costly, time consuming and subject us to unanticipated delays; even if we obtain regulatory approval for some of our products, those products may still face regulatory difficulties.
Our product candidates under development are subject to extensive and rigorous domestic and foreign regulation. We have not received regulatory approval in the United States or any foreign market for any of our product candidates.
We expect to rely on collaborative parties to file investigational new drug applications and generally direct the regulatory approval process for many of our product candidates. These collaborative parties may not obtain necessary approvals from the FDA or other regulatory authorities for any product candidates. If we fail to obtain required governmental approvals, we or our collaborative parties will experience delays in or be precluded from marketing products developed through our research. In addition, the commercial use of our products will be limited. If we have disagreements as to ownership of clinical trial results or regulatory approvals, and the FDA refuses to recognize us as holding, or having access to, the regulatory approvals necessary to commercialize our products, we may experience delays in or be precluded from marketing products developed through our research.
The regulatory review and approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve ongoing requirements for post-marketing studies. Additional or more rigorous governmental regulations may be promulgated that could delay regulatory approval of our or a collaborator’s product candidates. Delays in obtaining regulatory approvals may:
• adversely affect the successful commercialization of any products that we or our collaborators develop;
• impose costly procedures on us or our collaborators;
• diminish any competitive advantages that we or our collaborators may attain; and
• adversely affect our receipt of revenues or royalties.
In addition, problems or failures with the products of others, including our competitors, could have an adverse effect on our ability to obtain or maintain regulatory approval for any of our product candidates or products.
Our clinical trials could take longer to complete than we project or may not be completed at all.
Although for planning purposes we project the commencement, continuation and completion of clinical trials, the actual timing of these events may be subject to significant delays relating to various causes, including scheduling conflicts with participating clinicians and clinical institutions, difficulties in identifying and enrolling patients who meet trial eligibility criteria, and shortages of available drug supply. We may not commence clinical trials involving any of our products or complete them as projected.
In our clinical trials, we treat patients who have failed conventional treatments and who are in advanced stages of cancer. There are a limited number of patient candidates available for our clinical trials, and other studies compete to recruit these patients into their clinical trials. We have experienced difficulties in recruiting a sufficient number of patients for our clinical trials. A failure to enroll sufficient numbers of patients could delay or bring to a close our clinical trials.
We have limited experience in conducting clinical trials. We rely on academic institutions or clinical research organizations to conduct, supervise or monitor some or all aspects of clinical trials involving our products. We will have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own.
In addition, we may suffer a delay in the completion of any one of our clinical trials because of requests from the FDA to revise the size or scope of the clinical trial. In particular, the FDA may require us to expand the number of patients in our Phase III clinical trial. Failure to commence or complete, or delays in, any of our planned clinical trials would adversely affect our stock price and prevent us from commercializing our products.
If testing of a particular product does not yield successful results, then we will be unable to commercialize that product.
If preclinical or clinical testing of one or more of our products does not yield successful results, the product will fail. To achieve the results we need, we must demonstrate our products’ safety and effectiveness in humans through extensive preclinical and clinical testing. Numerous unforeseen events may arise during, or as a result of, the testing process, including the following:
• safety and effectiveness results attained in early human clinical trials may not be indicative of results that are obtained in later clinical trials;
• the results of preclinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;
• after reviewing test results, we or our collaborators may abandon projects that we previously believed to be promising;
• we, our collaborators or regulators, may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks; and
• potential products may not have the desired effect or may have undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if approved.
Clinical testing is very expensive and can take many years. The failure to adequately demonstrate the safety and effectiveness of a product would delay or prevent regulatory approval of the product.
We may not be able to protect our intellectual property or operate our business without infringing upon the intellectual property rights of others.
We can protect our technology from unauthorized use by others only to the extent that our technology is covered by valid and enforceable patents or effectively maintained as trade secrets. As a result, we depend in part on our ability to:
• obtain patents;
• license technology rights from others;
• protect trade secrets;
• operate without infringing upon the proprietary rights of others; and
• prevent others from infringing on our proprietary rights.
The patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. Our patents, or patents that we license from others, may not provide us with proprietary protection or competitive advantages against competitors with similar technologies. We may not have been the first to make the inventions covered by each of our issued or pending applications or we may not have been the first to file patent applications for such inventions. Competitors may have independently developed technologies similar to ours. Competitors may challenge or circumvent our patents or patent applications. Courts may find our patents invalid. Due to the extensive time required for development, testing and regulatory review of our potential products, our patents may expire or remain in existence for only a short period following commercialization, which would reduce or eliminate any advantage the patents may give us.
We may need to license the right to use third-party patents and intellectual property to develop and market our products. We may not acquire such required licenses on acceptable terms, if at all. If we do not obtain such licenses, we may need to design around other parties’ patents, or we may not be able to proceed with the development, manufacture or sale of our products. We may face litigation to defend against claims of infringements, assert claims of infringement, enforce our patents, protect our trade secrets or know-how, or determine the scope and validity of others’ proprietary rights.
In addition, we may require interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions relating to our patent applications. These activities, and especially patent litigation, are costly.
Specifically, we are aware of patent applications filed in the United States and abroad that, if they were to issue, would cover ONYX-015 and other viruses that selectively replicate. We are aware of patents that might cover our RB selective viruses and may cover our method for producing and purifying viruses. We are also aware of patent applications that claim enzymes for converting drugs to their active forms for treating disease, including cancers, and claim methods of delivering the enzymes using a virus. We may be unable to commercialize our products affected by these patents, if any of these patents are issued and we are unable to:
• successfully challenge any claims asserting that our product candidates or products infringe the patent;
• design around the patent; or
• negotiate a reasonable license under the patent.
We face product liability risks and may not be able to obtain adequate insurance.
The use of any of our product candidates in clinical trials, and the sale of any approved products, exposes us to liability claims resulting from the use or sale of our products. We have obtained limited product liability insurance coverage for our clinical trials. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for product candidates in development. However, insurance coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. We may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in:
• decreased demand for a product;
• injury to our reputation;
• withdrawal of clinical trial volunteers; and
• loss of revenues.
Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material.
We deal with hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our research and process development activities involve the controlled use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, we may be held liable for any resulting damages, which may exceed our financial resources and may seriously harm our business. In addition, if we develop a manufacturing capacity, we may incur substantial costs to comply with environmental regulations and would be subject to the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing process.
Our stock price is highly volatile.
The market price of our common stock has been highly volatile and is likely to continue to be volatile. Factors affecting our stock price include:
• results of clinical trials;
• ability to accrue patients;
• ability to manufacture sufficient supply of ONYX-015;
• success or failure in obtaining regulatory approval by us or our competitors;
• public concern as to the safety and efficacy of our products;
• developments concerning the business of collaborative parties or their transactions with third parties;
• developments in our relationship with collaborative parties;
• developments in patent or other proprietary rights;
• additions or departures of key personnel;
• announcements by us or our competitors of technological innovations or new commercial therapeutic products;
• published reports by securities analysts;
• fluctuations in stock market price and volume, which are particularly common among securities of biotechnology companies;
• fluctuations in our operating results;
• statements of governmental officials; and
• changes in healthcare reimbursement policies.
Existing stockholders have significant influence over us.
Our executive officers, directors and 5 percent stockholders own, in the aggregate, approximately 23 percent of our outstanding common stock. As a result, these stockholders will be able to exercise substantial influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could have the effect of delaying or preventing a change in control of our company and will make some transactions difficult or impossible to accomplish without the support of these stockholders.
Bayer, a collaborative party, has the right to have its nominee elected to our board of directors as long as we continue to collaborate on the development of a compound. In addition, International Biotechnology Trust plc has the right to have its nominee elected to our board of directors as long as it continues to own at least 66 2/3 percent of our common stock it purchased in January 1998. Because of these rights and ownership and voting arrangements, our officers, directors and principal stockholders may be able to effectively control the election of all members of the board of directors and to determine all corporate actions.
Substantial sales of common stock by our existing stockholders could cause our stock price to fall.
The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
We are at risk of securities class action litigation due to our expected stock price volatility.
In the past, stockholders have often brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us because biotechnology companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, and could seriously harm our business, financial condition and results of operations.
Provisions in Delaware law, our charter and executive change in control severance benefits agreements may prevent or delay a change of control.
We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent Delaware corporations from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s stock unless:
• the board of directors approved the transaction where the stockholder acquired 15% or more of the corporation’s stock;
• after the transaction where the stockholder acquired 15% or more of the corporation’s stock, the stockholder owned at least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or
• on or after this date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the outstanding voting stock that is not owned by the stockholder.
As such, these laws could prohibit or delay mergers or a change of control of us and may discourage attempts by other companies to acquire us.
Our certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control or management. These provisions include:
• our board is classified into three classes of directors as nearly equal in size as possible with staggered three year-terms;
• the authority of our board to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of these shares, without stockholder approval;
• all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent;
• special meetings of the stockholders may be called only by the chairman of the board, the chief executive officer or the board; and
• no cumulative voting.
These provisions may have the effect of delaying or preventing a change of control, even at stock prices higher than the then current stock price.
In February 2001, we entered into change of control severance agreements with each of our executive officers. Under these agreements, in the event an executive officer’s employment is terminated within 13 months of the effective date of a change in control, he or she would be entitled to severance benefits, including the vesting of stock options held by him or her.
The provisions of these change of control severance agreements may have the effect of delaying or preventing a change of control.
On November 6, 2001, the Company announced that it will sell and license to Syrrx Inc. (“Syrrx”) assets from the Company’s small molecules discovery program, including drug targets, related reagents and assays and compound libraries. In return, the Company will receive shares of the Series D Preferred Stock of Syrrx, future milestone payments and royalties on pharmaceutical products resulting from these assets.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.36* Amendment #1 to the Collaboration Agreement between the Company and Warner-Lambert dated August 6, 2001.
10.37* Amendment #3 to the Research, Development and Marketing Collaboration Agreement between the Company and Warner-Lambert dated August 6, 2001.
10.38* Amendment #3 to the Amended and Restated Research, Development and Marketing Collaboration Agreement between the Company and Warner-Lambert dated August 6, 2001.
* Confidential treatment has been requested for portions of this document.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by this report.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
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ONYX PHARMACEUTICALS, INC. |
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Date: November 14, 2001 |
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By: |
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/s/ Hollings C. Renton |
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Hollings
C. Renton |
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Date: November 14, 2001 |
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By: |
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/s/ Marilyn E. Wortzman |
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Marilyn
E. Wortzman |
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Exhibit Number |
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Description of Exhibits |
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10.36* |
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Amendment #1 to the Collaboration Agreement between the Company and Warner-Lambert dated August 6, 2001. |
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10.37* |
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Amendment #3 to the Research, Development and Marketing Collaboration Agreement between the Company and Warner-Lambert dated August 6, 2001. |
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10.38* |
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Amendment #3 to the Amended and Restated Research, Development and Marketing Collaboration Agreement between the Company and Warner-Lambert dated August 6, 2001. |
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* Confidential treatment has been requested for portions of this document.