e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
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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(I.R.S. Employer ID Number) |
incorporation or organization) |
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2100 Powell Street
Emeryville, California 94608
(Address of principal executive offices)
(510) 597-6500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 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.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares
outstanding of each of the issuers classes of Common Stock, as
of the latest practicable date. The number of outstanding shares of the registrants Common Stock,
$0.001 par value, was 55,577,936 as of May 1, 2008.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONDENSED BALANCE SHEETS
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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(Note 1) |
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(In thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
276,341 |
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$ |
161,653 |
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Short-term marketable securities |
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131,945 |
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307,997 |
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Receivable from collaboration partner |
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37,761 |
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4,702 |
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Prepaid expenses and other current assets |
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7,636 |
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6,304 |
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Total current assets |
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453,683 |
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480,656 |
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Long-term marketable securities |
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48,328 |
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Property and equipment, net |
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2,840 |
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3,146 |
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Other assets |
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286 |
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281 |
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$ |
505,137 |
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$ |
484,083 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
191 |
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$ |
271 |
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Payable to collaboration partner |
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8,862 |
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Accrued liabilities |
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4,516 |
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2,065 |
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Accrued clinical trials and related expenses |
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4,713 |
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3,323 |
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Accrued compensation |
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3,606 |
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5,782 |
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Total current liabilities |
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21,888 |
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11,441 |
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Advance from collaboration partner |
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30,372 |
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39,234 |
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Deferred rent and lease incentives |
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1,260 |
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1,171 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock |
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56 |
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56 |
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Additional paid-in capital |
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910,289 |
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904,506 |
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Receivable from stock option exercises |
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(23 |
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Accumulated other comprehensive gain (loss) |
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(1,488 |
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356 |
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Accumulated deficit |
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(457,240 |
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(472,658 |
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Total stockholders equity |
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451,617 |
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432,237 |
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$ |
505,137 |
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$ |
484,083 |
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See accompanying notes.
3
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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(In thousands, except per |
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share amounts) |
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Net revenue from unconsolidated joint business |
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$ |
37,738 |
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$ |
3,025 |
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Operating expenses: |
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Research and development |
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7,438 |
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5,534 |
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Selling, general and administrative |
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19,844 |
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13,183 |
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Total operating expenses |
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27,282 |
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18,717 |
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Income (loss) from operations |
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10,456 |
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(15,692 |
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Investment income |
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5,271 |
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3,497 |
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Income (loss) before income taxes |
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15,727 |
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(12,195 |
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Provision for income taxes |
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309 |
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Net income (loss) |
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$ |
15,418 |
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$ |
(12,195 |
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Net income (loss) per share: |
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Basic |
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$ |
0.28 |
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$ |
(0.26 |
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Diluted |
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$ |
0.27 |
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$ |
(0.26 |
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Shares used in computing net income (loss) per share: |
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Basic |
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55,388 |
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46,278 |
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Diluted |
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56,566 |
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46,278 |
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See accompanying notes.
4
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31, |
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2008 |
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2007 |
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(In thousands) |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
15,418 |
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$ |
(12,195 |
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Adjustments to reconcile net income (loss) to net
cash used in operating activities: |
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Realized
gains on sales of short-term marketable securities |
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(483 |
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Depreciation and amortization |
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346 |
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195 |
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Stock-based compensation |
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4,838 |
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3,397 |
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Changes in operating assets and liabilities: |
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Receivable from collaboration partner |
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(33,059 |
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224 |
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Prepaid expenses and other current assets |
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(1,332 |
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(217 |
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Other assets |
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(5 |
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(81 |
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Accounts payable |
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(80 |
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(128 |
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Accrued liabilities |
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2,451 |
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(671 |
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Accrued clinical trials and related expenses |
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1,390 |
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(4,232 |
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Payable to collaboration partner |
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702 |
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Accrued compensation |
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(2,176 |
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(1,204 |
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Deferred lease incentives |
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89 |
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Net cash used in operating activities |
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(12,603 |
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(14,210 |
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Cash flows from investing activities: |
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Purchases of marketable securities |
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(69,558 |
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(104,524 |
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Sales of
marketable securities |
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82,916 |
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Maturities of marketable securities |
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113,004 |
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100,628 |
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Capital expenditures |
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(40 |
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(590 |
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Net cash provided by (used in) investing activities |
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126,322 |
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(4,486 |
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Cash flows from financing activities: |
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Purchases of treasury stock |
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(528 |
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Net proceeds from issuances of common stock |
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1,497 |
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5,075 |
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Net cash provided by financing activities |
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969 |
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5,075 |
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Net increase (decrease) in cash and cash equivalents |
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114,688 |
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(13,621 |
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Cash and cash equivalents at beginning of period |
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161,653 |
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94,413 |
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Cash and cash equivalents at end of period |
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$ |
276,341 |
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$ |
80,792 |
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See accompanying notes.
5
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) 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 GAAP 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 three months ended
March 31, 2008 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008, or for any other future operating periods.
The condensed balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date, but does not include all of the information and footnotes required by GAAP
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 and the references we, us and our) Annual
Report on Form 10-K for the year ended December 31, 2007 (the 2007 Annual Report).
Note 2. Net Revenue from Unconsolidated Joint Business
Nexavar is currently marketed and sold primarily in the United States and the European Union for
the treatment of advanced kidney cancer and liver cancer. Nexavar also has regulatory applications
pending in other territories internationally. The Company co-promotes Nexavar in the United States
with Bayer Healthcare Pharmaceuticals Corporation Inc., (Bayer) under collaboration and
co-promotion agreements. In March 2006, the Company and Bayer entered into a Co-Promotion
Agreement to co-promote Nexavar in the United States. This agreement amends the original 1994
Collaboration Agreement and supersedes the provisions of that agreement that relate to the
co-promotion of Nexavar in the United States. Outside of the United States, the terms of the
Collaboration Agreement continue to govern. Under the terms of the Co-Promotion Agreement and
consistent with the Collaboration Agreement, the Company and Bayer will share equally in the
profits or losses of Nexavar, if any, in the United States, subject only to the Companys continued
co-funding of the development costs of Nexavar worldwide, excluding Japan, and the Companys
continued co-promotion of Nexavar in the United States. In the United States, the Company
contributes half of the overall number of sales force personnel required to market and promote
Nexavar and half of the medical science liaisons to support Nexavar. The Company and Bayer each
bears its own sales force and medical science liaison expenses. These expenses are not included in
the calculation of the profits or losses of the collaboration. The collaboration was created
through a contractual arrangement, not through a joint venture or
other legal entity. In Japan, Bayer funds all product development,
and the Company will receive a royalty on any sales.
The Company reports the amount due to or from Bayer to balance the companies economics under the
Nexavar collaboration as a single line item. This line item consists of the Companys share of the
pretax collaboration profit or loss generated from the collaboration and the reimbursement of the
Companys shared marketing and research and development costs related to Nexavar. Under the
collaboration, Bayer recognizes all revenue from the sale of Nexavar worldwide.
Prior to
the first quarter of 2008, Onyx reported this line item as net
expense due to (from) unconsolidated joint business. The amount
generated from the collaboration plus the reimbursement of the
Companys shared marketing and research and development costs
related to Nexavar have resulted in income from operations for
the Company since the first quarter of 2007. Therefore, the Company is
reporting this line item as net revenue from unconsolidated joint
business beginning in 2008 instead of net expense due from
unconsolidated joint business.
Net revenue from unconsolidated joint business was $37.7 and $3.0 million for the three months
ended March 31, 2008 and 2007, respectively, calculated as follows:
6
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Three Months Ended March 31, |
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2008 |
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2007 |
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(In thousands) |
Onyxs share of collaboration profit (loss) |
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$ |
25,858 |
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$ |
(4,430 |
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Reimbursement of Onyxs direct development and marketing expenses |
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11,880 |
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7,455 |
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Net revenue from unconsolidated joint business |
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$ |
37,738 |
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$ |
3,025 |
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The
Companys share of the development costs incurred since inception under the collaboration was $321.0
million as of March 31, 2008 and $235.6 million as of March 31, 2007.
Note 3. Stock-Based Compensation
The Company accounts for stock-based compensation to employees and directors in accordance with
Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share-Based Payment, (SFAS
123(R)), which was adopted January 1, 2006, utilizing the modified prospective transition method.
Total employee stock-based compensation expense was $5.2 million and $3.0 million for the three
months ended March 31, 2008 and 2007, respectively. The stock-based compensation expense for the
three months ended March 31, 2008 includes $2.0 million for
the modifications of stock-based awards relating to two employees. The terms of the modifications included accelerated
vesting and the extension of the vesting period for stock-based
awards previously granted.
Employee Stock Plans
In February 2008, the Board approved an amendment to the 2005 Equity Incentive Plan (Incentive
Plan), subject to stockholder approval at the Companys annual meeting of stockholders scheduled
for May 14, 2008, to increase the number of shares of common stock authorized for issuance under
the Incentive Plan by 3,100,000 shares, to a total of 12,260,045 shares.
Valuation Assumptions
As of March 31, 2008 and 2007, the fair value of stock-based awards for employee stock option
awards and employee stock purchases made under the ESPP was estimated using the Black-Scholes
option pricing model. The following weighted average assumptions were used:
7
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
Stock Option Plans: |
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Risk-free interest rate |
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2.85% |
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4.71% |
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Expected life |
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4.4 years |
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4.3 years |
Expected volatility |
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64% |
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64% |
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Expected dividends |
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None |
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None |
Weighted average option fair value |
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$ 16.87 |
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$ 13.33 |
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Stock Bonus Awards: |
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Expected life |
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3 years |
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3 years |
Expected dividends |
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None |
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None |
Weighted average fair value per share |
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$ 30.44 |
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$ 24.84 |
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ESPP: |
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Risk-free interest rate |
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4.95% |
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5.17% |
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Expected life |
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6 months |
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6 months |
Expected volatility |
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64% |
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60% |
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Expected dividends |
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None |
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None |
Weighted average shares fair value |
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$ 8.57 |
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$ 4.97 |
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Note 4. Income Taxes
The Company accounts for income taxes based
upon Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (SFAS 109). Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company continues to carry a full valuation
allowance on all of its deferred tax assets. The tax years 1992 through 2006 remain subject to
examination by the taxing jurisdictions to which the Company is subject.
For the quarter ended March 31, 2008,
in accordance with APB 28, Interim
Financial Reporting, and Interpretation No. 18,
Accounting for Income Taxes in Interim Periods and
Interpretation of APB Opinion No. 28, the Company elected to
compute its income tax provision on a year-to-date basis instead of
estimating its annual effective tax rate. Therefore, for
the quarter ended March 31, 2008, the Company recorded a provision for income taxes of $309,000
related to income from operations. Based on the Companys
ability to fully offset federal taxable
income by its net operating loss carryforwards, the Companys estimated tax expense is principally
related to federal alternative minimum tax, which results in an effective federal tax rate of approximately 2%
for the quarter ended March 31, 2008.
Note 5. Net Income (Loss) Per Share
Basic net income (loss) per share amounts for each period presented were computed using the
weighted average number of shares of common stock outstanding. Diluted net income (loss) per share
amounts for each period presented were computed using the weighted average number of potentially
dilutive common shares issuable in connection with stock-based awards and warrants under the treasury
stock method. Dilutive net income per share does not include the effect of 612,700 stock-based
awards that were outstanding during the three months ended March 31, 2008. These stock-based awards
were not included in the computation of diluted net income per share because the proceeds received,
if any, from such stock-based awards combined with the average unamortized compensation costs were
greater than the average market price of our common stock, and, therefore, their effect would have
been antidilutive. Potentially dilutive outstanding common shares consisting of 5,424,864 stock-based
awards and warrants were not included in the computation of diluted net loss per share for the
quarter ended March 31, 2007 because their effect would have been antidilutive.
8
Note 6. Comprehensive Income (Loss)
Comprehensive income (loss) is composed of net income (loss) and other comprehensive income (loss).
Other comprehensive income (loss) is comprised of unrealized holding gains and losses on the
Companys available-for-sale securities that are excluded from net loss and reported separately in
stockholders equity. Comprehensive income (loss) and its components are as follows:
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Three Months Ended |
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March 31, |
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2008 |
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2007 |
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(In thousands) |
Net income (loss) as reported |
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$ 15,418 |
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$ (12,195 |
) |
Other comprehensive income (loss): |
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Change in unrealized gain (loss) on available-for-sale securities |
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(1,844 |
) |
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73 |
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Comprehensive income (loss) |
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$ 13,574 |
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$ (12,122 |
) |
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Note 7. Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid
investments with original maturities of three months or
less. Short-term and long-term investments consist of marketable securities and are classified as
securities available for sale under Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, (SFAS 115). Such securities
are reported at fair value, with unrealized gains and losses excluded from earnings and shown
separately as a component of accumulated other comprehensive income or loss within stockholders
equity. The Company may pay a premium or receive a discount upon the purchase of marketable
securities. Interest earned and gains realized on marketable securities and amortization of
discounts received and accretion of premiums paid on the purchase of marketable securities are
included in investment income.
The Companys investment portfolio includes
$50 million of AAA rated student loans with an
auction reset feature (auction rate securities). Since
February 2008, these types of securities have
experienced failures in the auction process. As a result of the auction failures, interest rates on
these securities reset at penalty rates linked to Libor or Treasury bill rates. The penalty rates
are generally higher than interest rates set at auction. Due to the failures in the auction
processes, these investments are not currently liquid. Therefore, the Company has reclassified
these auction rate securities from short-term investments to long-term investments on the
accompanying unaudited Condensed Balance Sheet at March 31, 2008. The Company has reduced the
carrying value of these investments by $1.7 million through accumulated other comprehensive
income or loss instead of earnings, which reflects a temporary impairment on these investments. Of
the $50 million invested in failed auction rate securities, the Company estimates the fair value of
these investments to be $48.3 million based on a discounted cash flow model.
Note 8. Long-Term Obligations
The Company received $40.0 million
in development payments from Bayer pursuant to its collaboration
agreement. These development payments contain no provision for interest. These development payments
are repayable to Bayer from a portion of the Companys share of collaboration profits after
deducting certain contractually agreed upon expenditures. As of
December 31, 2007, $766,000 of these
development payments was repaid to Bayer leaving a remaining balance
of $39.2 million. Based on the collaboration profit for the quarter
ended March 31, 2008,
$8.9 million was reclassified as a current liability on the Companys accompanying balance
sheet as of March 31, 2008.
Note 9. Recent Accounting Pronouncements
In December 2007, the Emerging Issues
Task Force, or EITF, issued Issue No. 07-1, Accounting for
Collaboration Arrangements Related to the Development and Commercialization of Intellectual
Property (EITF 07-1), which focuses on how the parties to a collaborative arrangement should
account for costs incurred and revenue generated on sales to third parties, how sharing payments
pursuant to a collaboration agreement should be presented in the income statement and certain
related disclosure questions. EITF 07-1 is effective for all fiscal years ending after December 15,
2008. Upon
9
adoption of ETIF 07-1, the Company expects to revise the financial presentation by
changing the classification of amounts in its Statement of Operations. This will have no impact on
previously reported amounts of net income (loss) or net income (loss) per share.
Note 10. Fair Value Measurements
In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with accounting principles generally
accepted in the United States, and expands disclosures about fair value measurements. The Company
has adopted the provisions of SFAS 157 as of January 1, 2008, for all financial assets and
liabilities. The adoption of SFAS 157 did not materially impact the Companys financial condition,
results of operations, or cash flow.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value, and requires that certain assets be measured at fair value on a recurring
basis. The three tiers include:
|
|
|
Level 1, defined as observable inputs such as quoted prices for identical assets in
active markets; |
|
|
|
|
Level 2, defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable; and |
|
|
|
|
Level 3, defined as unobservable inputs in which little or no market data exists,
therefore requiring management to develop its own assumptions based on best estimates
of what market participants would use in pricing an asset or liability at the reporting
date. |
As of March 31, 2008, the Companys fair value hierarchies for its financial assets, which require
fair value measurement on a recurring basis under SFAS 157, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Money market funds |
|
$ |
85,761 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
85,761 |
|
Commercial paper |
|
|
|
|
|
|
99,824 |
|
|
|
|
|
|
|
99,824 |
|
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
48,328 |
|
|
|
48,328 |
|
U.S. government agencies |
|
|
|
|
|
|
75,643 |
|
|
|
|
|
|
|
75,643 |
|
U.S. treasury bills |
|
|
142,625 |
|
|
|
|
|
|
|
|
|
|
|
142,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
228,386 |
|
|
$ |
175,467 |
|
|
$ |
48,328 |
|
|
$ |
452,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
assets consist of student loans with an auction reset feature (auction rate
securities), which are classified as available for sale securities and reflected at fair value. In
February 2008, auctions began to fail for these securities and each
auction since then has failed. Based on the overall failure rate of these auctions, the frequency
of the failures, and the underlying maturities of the securities, a portion of which are greater
than 30 years, the Company has classified auction rate securities as long-term assets on our
balance sheet. As of March 31, 2008 the fair values of these securities are estimated utilizing a
discounted cash flow model. The following table provides a summary of changes in fair
value of the Companys Level 3 financial assets as of March 31, 2008:
|
|
|
|
|
|
|
Municipal Bonds |
|
|
|
(In thousands) |
|
Balance at December 31, 2007 |
|
$ |
50,000 |
|
Unrealized loss: |
|
|
|
|
In other comprehensive income |
|
|
(1,672 |
) |
In earnings |
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
$ |
48,328 |
|
|
|
|
|
10
As a result of the temporary decline in fair value for the Companys auction rate securities, which
the Company attributes to liquidity issues rather than credit issues, the Company has recorded an
unrealized loss of $1.7 million in the accumulated other
comprehensive income (loss) line of stockholders equity. All of the auction rate
securities held by the Company at March 31, 2008, were in securities collateralized by student loan
portfolios, which are substantially guaranteed by the United States government. Due to the
Companys belief that the market for these student loan collateralized instruments may take in
excess of twelve months to fully recover, the Company has classified these investments as long-term
on the unaudited Condensed Balance Sheet at March 31, 2008. Any future fluctuation in
fair value related to these instruments that the Company deems to be temporary, including any
recoveries of previous write-downs, will be recorded in accumulated
other comprehensive income (loss). If
the Company determines that any future valuation adjustment is other than temporary, it will record
a charge to earnings as appropriate.
11
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. We use words such as
may, will, expect, anticipate, estimate, intend, plan, predict, potential,
believe, should and similar expressions to identify forward-looking statements. These
statements appearing throughout our Form 10-Q are statements regarding our intent, belief, or
current expectations, primarily regarding our operations. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this Form 10-Q. Our actual
results could differ materially from those anticipated in these forward-looking statements for many
reasons, including those set forth under Item 1A Risk Factors in this Quarterly Report on Form
10-Q.
Overview
We are a biopharmaceutical company dedicated to developing innovative therapies that target the
molecular mechanisms that cause cancer. With our collaborators, we are developing small molecule
drugs with the goal of changing the way cancer is treated TM. We are applying our
expertise to develop and commercialize oral anticancer therapies designed to prevent cancer cell
proliferation and angiogenesis by inhibiting proteins that signal or support tumor growth. By
exploiting the genetic differences between cancer cells and normal cells, we aim to develop and
market novel anticancer agents that minimize damage to healthy tissue. Our first commercially
available product, Nexavar® (sorafenib) Tablets, being developed with our collaborator,
Bayer HealthCare Pharmaceuticals Inc., or Bayer, is approved in the United States, European Union
and other territories worldwide, for advanced kidney cancer and liver cancer. Nexavar is a novel,
orally available kinase and angiogenesis inhibitor, a new class of anticancer treatments that
target signaling pathways important to the proliferation of cancer cells. In December 2005 Nexavar
became the first newly approved systemic therapy for patients with advanced kidney cancer in over a
decade. Subsequently, in the fourth quarter of 2007, Nexavar was approved as the first and is
currently the only systemic therapy for the treatment of patients with liver cancer. With our
collaborator, Bayer, we are commercializing Nexavar ® (sorafenib) Tablets, for the
treatment of patients with advanced kidney cancer and liver cancer. Nexavar is now approved in more
than 70 countries for the treatment of advanced kidney cancer and in
more than 40 countries for the
treatment of liver cancer. In the United States, Bayer and Onyx co-promote Nexavar. Outside of the
United States, Bayer manages all commercialization activities. For the quarters ended March 31,
2008 and 2007, worldwide net sales of Nexavar as recorded by Bayer were $151.9 and $60.9 million,
respectively.
With the approval of Nexavar for the treatment of advanced kidney cancer and liver cancer, we and
Bayer have established the Nexavar brand and created a global commercial oncology presence. In
order to benefit as many patients as possible, we and Bayer are continuing to investigate the
administration of Nexavar with previously approved anticancer therapeutics in other cancers and
settings and in combination with existing therapies. We and Bayer have ongoing clinical trials in
lung cancer, breast cancer and several other cancers.
We and Bayer are developing and marketing Nexavar under our collaboration and co-promotion
agreements. We fund 50% of the development costs for Nexavar worldwide, excluding Japan. With
Bayer, we co-promote Nexavar in the United States and share equally in any profits or losses.
Outside of the United States, excluding Japan, Bayer has exclusive marketing and commercialization
rights of Nexavar and we share profits equally. In Japan, Bayer funds all product development, and
we will receive a royalty on any sales.
We have had significant losses since inception. Our ability to achieve continued and sustainable
profitability is uncertain and is dependant on a number of factors. These factors include, but are
not limited to, the level of patient demand for Nexavar, the ability of Bayers distribution
network to process and ship product on a timely basis, investments in sales and marketing efforts
to support the sales of Nexavar, Bayer and our investments in the research and development of
Nexavar, fluctuations in foreign exchange rates, and expenditures we may incur to acquire
additional products. Our operating results will likely fluctuate from fiscal quarter to fiscal
quarter and from year to year, and are difficult to predict. Since inception, we have relied on
public and private financings, combined with milestone payments from our collaborators to fund our
operations and may continue to do so in future periods. As of March 31, 2008, our accumulated
deficit was approximately $457.2 million.
12
Our business is subject to significant risks, including the risks inherent in our development
efforts, the results of the Nexavar clinical trials, the marketing of Nexavar as a treatment for
patients in approved indications, our dependence on collaborative parties, uncertainties associated
with obtaining and enforcing patents, the lengthy and expensive regulatory approval process and
competition from other products. For a discussion of these and some of the other risks and
uncertainties affecting our business, see Item 1A Risk Factors of this Quarterly Report on
Form
10-Q.
Critical Accounting Policies and the Use of Estimates
Critical accounting policies are those that require significant estimates, assumptions and
judgments by management about matters that are inherently uncertain at the time that the financial
statements are prepared such that materially different results might have been reported if other
assumptions had been made. These estimates form the basis for making judgments about the carrying
values of assets and liabilities. We base our estimates and judgments on historical experience and
on various other assumptions that we believe to be reasonable under the circumstances. We consider
certain accounting policies related to net revenue from unconsolidated joint business, stock-based
compensation, research and development expenses and use of estimates to
be critical policies. Significant estimations used in 2008 included assumptions used in the
determination of stock-based compensation related to stock options granted, net revenue from
unconsolidated joint business, and research and development expenses. Actual results could differ
materially from these estimates. There were no changes to our critical accounting policies since we
filed our Annual Report on Form 10-K, for the year ended December 31, 2007, with the Securities and
Exchange Commission, or SEC. For a description of our critical accounting policies, please refer to
our 2007 Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Results of Operations
Three months ended March 31, 2008 and 2007
Revenue
Nexavar, our only marketed product, was approved in the U.S. in December 2005. In accordance with
our collaboration agreement with Bayer, Bayer recognizes all revenue from the sale of Nexavar. As
such, for the three months ended March 31, 2008 and March 31, 2007, we reported no revenue. For the
three months ended March 31, 2008, Nexavar net sales recorded by Bayer were $151.9 million,
primarily in the United States and the European Union. This represents an increase of $91.0
million or 149% over Nexavar net sales of $60.9 million recorded by Bayer for the quarter ended
March 31, 2007.
Net Revenue from Unconsolidated Joint Business
Nexavar is currently marketed and sold in the United States, several countries in the European
Union and other countries worldwide. We co-promote Nexavar in the United States with Bayer under a
collaboration agreement. Under the terms of the collaboration agreement, we share equally in the
profits or losses of Nexavar, if any, in the United States, subject only to our continued
co-funding of the development costs of Nexavar worldwide, excluding
Japan, and our continued
promotion of Nexavar in the United States. In the United States, we contribute half of the overall
number of sales force personnel required to market and promote Nexavar and half of the medical
science liaisons to support Nexavar. Onyx and Bayer each bears its own sales force and medical
science liaison expenses. These expenses are not included in the calculation of the profits or
losses of the collaboration.
We report the amount due to or from Bayer to balance the companies economics under the Nexavar
collaboration as a single line item. This line item consists of Onyxs share of the pretax
collaboration profit (loss) generated from the collaboration plus the reimbursement of Onyxs
marketing and research and development costs related to Nexavar. Net revenue from unconsolidated
joint business for the three months ended
March 31, 2008 and 2007 is calculated as follows:
13
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Product revenue, net (as recorded by Bayer) |
|
$ |
151,896 |
|
|
$ |
60,881 |
|
Combined cost of goods sold, distribution, selling, general and
administrative expenses |
|
|
62,703 |
|
|
|
36,450 |
|
Combined research and development expenses |
|
|
37,478 |
|
|
|
33,290 |
|
|
|
|
|
|
|
|
Combined collaboration profit (loss) |
|
$ |
51,715 |
|
|
$ |
(8,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Onyxs share of collaboration profit (loss) |
|
$ |
25,858 |
|
|
$ |
(4,430 |
) |
Reimbursement of Onyxs direct development and marketing expenses |
|
|
11,880 |
|
|
|
7,455 |
|
|
|
|
|
|
|
|
Net revenue from unconsolidated joint business |
|
$ |
37,738 |
|
|
$ |
3,025 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008 and 2007, net revenue from unconsolidated joint business
was $37.7 and $3.0, respectively. The increase in net revenue from
unconsolidated joint business is primarily due to an increase in
Nexavar product sales recognized by Bayer offset by increases in the
combined commercial expenses to support the launch of Nexavar around
the world and
increased development expenses for Nexavar primarily related to the breast
cancer program.
Net revenue due from unconsolidated joint business increases with increases in the profitability of
the collaboration and with increases in the amount of reimbursement for our direct development
and marketing expenses. We expect Bayers and our shared Nexavar research and development expenses to increase in
future periods as the companies develop Nexavar for indications beyond liver and advanced kidney
cancer. With the approval of Nexavar in the European Union and pending approvals in other
international territories, we also expect Bayers and our shared cost of goods sold, distribution,
selling and general administrative expense to increase as Bayer continues to expand Nexavar
marketing and sales activities outside of the United States.
Research and Development Expenses
Research and development expenses were $7.4 million for the three months ended March 31, 2008, a
net increase of $1.9 million, or 35%, from $5.5 million in the same period in 2007. The increase is
primarily due to the increase in activities in our breast cancer program for Nexavar partially
offset by a decrease in activities in the melanoma program for Nexavar.
The major components of research and development costs include clinical manufacturing costs,
clinical trial expenses, consulting and other third-party costs, salaries and employee benefits,
stock-based compensation expense, supplies and materials, and allocations of various overhead and
occupancy costs. We expect research and development expenses to increase as we increase clinical
development activity related to Nexavar.
Together with Bayer, we have implemented a broad-based global development strategy for Nexavar that
implements simultaneous clinical programs currently designed to expand the number of approved
indications of Nexavar and evaluate the use of Nexavar in new and/or novel combinations. Our
global development plan has included major Phase 3 studies in lung, kidney and liver in the past, and
currently includes additional major Phase 3 clinical trials in metastatic melanoma comparing the
administration of Nexavar in combination with the chemotherapeutics carboplatin and paclitaxel, as
well as Nexavar with standard chemotherapeutic agents in non-small cell lung cancer. The
completion dates of these trials are currently unknown. As of March 31, 2008, our share of the
Nexavar development costs incurred to date under the collaboration were $321.0 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $19.8 million for the three months ended March
31, 2008, a net increase of $6.7 million from $13.1 million in the same period in 2007. This
increase is due to Onyx incurring more of the shared marketing
expenses in the United States and an
increase in headcount in the commercial and administrative functions, including
14
executive
and corporate development, to support our planned growth. The quarter
ended March 31, 2008 included non-recurring employee related
expenses consisting of $2 million for modifications of previously granted stock-based awards for
two employees and $2 million for compensation, search fees and
other expenses related to the transition of the chief executive
officer.
Selling, general and administrative expenses consist primarily of salaries, employee benefits,
consulting, advertising and promotion expenses, other third party costs, corporate functional
expenses and allocations for overhead and occupancy costs. We expect our selling, general and
administrative expenses to increase due to increases in marketing expenses relating to Nexavar and
increases in personnel.
Investment Income
Investment income consists of interest income and realized gains or losses from the sale of
marketable equity investments. We had investment income of $5.3 million for the three months ended
March 31, 2008, an increase of $1.8 million from $3.5 million in the same period in 2007. The
increase was primarily due to higher average investment balances for the three months ended March
31, 2008.
Liquidity and Capital Resources
Since our inception, we have incurred significant losses, and we have relied primarily on public
and private financing, combined with milestone payments received from our collaborations to fund
our operations.
At March 31, 2008, we had cash, cash equivalents and short and long-term marketable securities of
$456.6 million, compared to $469.7 million at December 31, 2007. The decrease of $13.1 million was
primarily attributable to net cash used in operations of $12.6 million. This use of cash was
partially offset by proceeds of $1.5 million received from the issuance of common stock through
stock option exercises and the employee stock purchase plan during the three-month period ended
March 31, 2008.
Our collaboration agreement with Bayer calls for creditable milestone-based payments. These amounts
are interest-free and are repayable to Bayer from a portion of any of our profits and royalties.
We received a total of $40.0 million of milestone payments from Bayer in connection with the
approval of Nexavar. As of
December 31, 2007, $766,000 of
these development payments was repaid to Bayer leaving a remaining
balance of $39.2 million. Based on the collaboration profit for
the three months ended March 31, 2008, $8.9 million has
been reclassified as a current liability on our accompanying balance
sheet as of March 31, 2008.
Total capital expenditures, primarily for furniture and information technology software, for
the three-month period ended March 31, 2008, were approximately $40,000. We currently expect to
make capital expenditures of approximately $3.7 million for the remainder of 2008 for leasehold
improvements, furniture and equipment, and information technology software.
Our
investment portfolio includes $50 million of AAA rated student
loans with an auction reset
feature (auction rate securities). Since
February 2008, these types of securities have experienced
failures in the auction process. As a result of the auction failures, interest rates on these
securities reset at penalty rates linked to Libor or Treasury bill rates. The penalty rates are
generally higher than interest rates set at auction. Due to failures in the auction processes,
these investments are not currently liquid. Therefore, we have reclassified these auction rate
securities from short-term investments to long-term investments on
our accompanying unaudited Condensed Balance Sheet
at March 31, 2008. We have reduced the carrying value of these investments by
$1.7 million through accumulated other comprehensive income or loss instead of earnings, which
reflects a temporary impairment on these investments. Of the $50 million invested in failed auction
rate securities, we estimate the fair value of these investments to be $48.3 million based on a
discounted cash flow model. Further adverse developments in the credit market could result in an
impairment charge through earnings.
Currently, we believe these investments are not other-than-temporarily impaired as all of them are
substantially backed by the federal government, but it is not clear in what period of time they
will be settled. We believe that, even after reclassifying these securities to long-term assets and
the possible requirement to hold all such securities for an indefinite period of time, our
remaining cash and cash equivalents and short-term investments will be sufficient to meet our
anticipated cash needs for at least the next twelve months.
15
We believe that our existing capital resources and interest thereon will be sufficient to fund
our current and planned operations beyond 2009. However, if we change our development plans,
including acquiring additional product candidates or complementary businesses, we may need
additional funds sooner than we expect. In addition, we anticipate that our co-development costs
for the Nexavar program may increase over the next several years as we continue to fund our share
of the clinical development program and prepare for potential product launches throughout the
world. These costs are currently unknown, but in the future we may need to raise additional capital
to continue to co-fund the program beyond 2009. We intend to seek any required additional funding
through collaborations, public and private equity or debt financings, capital lease transactions or
other available 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 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.
Recently Issued Accounting Standards
In December 2007, the Emerging Issues Task Force, or EITF, issued Issue No. 07-1, Accounting for
Collaboration Arrangements Related to the Development and Commercialization of Intellectual
Property (EITF 07-1), which focuses on how the parties to a collaborative arrangement should
account for costs incurred and revenue generated on sales to third parties, how sharing payments
pursuant to a collaboration agreement should be presented in the income statement and certain
related disclosure questions. EITF 07-1 is effective for all fiscal years ending after December 15,
2008. Upon adoption of ETIF 07-1, we expect to revise the financial presentation by changing the
classification of amounts in the Statement of Operations. This will have no impact on previously
reported amounts of net income (loss) or net income (loss) per share.
In addition, there were several critical recently issued accounting standards, described in our
2007 Annual Report, which we have adopted as of January 1, 2008. These included EITF 07-3,
Accounting for Advance Payments for Goods or Services to be Used in Future Research and
Development Activities, SFAS 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No. 115, and SFAS 157, Fair Value
Measurements. None of these accounting standards have materially impacted the financial condition,
results of operations, or cash flow of the Company.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal while at the same time
maximize the income we receive from our investments without significantly increasing risk. Our
exposure to market rate risk for changes in interest rates relates primarily to our investment
portfolio. This means that a change in prevailing interest rates may cause the principal amount of
the investments to fluctuate. By policy, we minimize risk by placing our investments with high
quality debt security issuers, limit the amount of credit exposure to any one issuer, limit
duration by restricting the term, and hold investments to maturity except under rare circumstances.
We maintain our portfolio of cash equivalents and marketable securities in a variety of securities,
including commercial paper, money market funds, and investment grade government and non-government
debt securities. Through our money managers, we maintain risk management control systems to monitor
interest rate risk. The risk management control systems use analytical techniques, including
sensitivity analysis. If market interest rates were to increase by 100 basis points, or 1%, as of
March 31, 2008, the fair value of our portfolio would decline by
approximately $395,000.
The table below presents the amounts and related weighted interest rates of our cash equivalents
and marketable securities at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Fair Value |
|
Interest |
|
|
|
|
|
Fair Value |
|
Interest |
|
|
Maturity |
|
(In millions) |
|
Rate |
|
Maturity |
|
(In millions) |
|
Rate |
Cash equivalents, fixed rate |
|
0 3 months |
|
$ |
271.9 |
|
|
|
2.64 |
% |
|
0 2 months |
|
$ |
160.0 |
|
|
|
4.79 |
% |
Marketable securities,
fixed rate |
|
0 24 months |
|
$ |
180.3 |
|
|
|
3.19 |
% |
|
0 12 months |
|
$ |
308.0 |
|
|
|
4.75 |
% |
We did not hold any derivative instruments as of March 31, 2008, and we have not held derivative
instruments in the past. However, our investment policy does allow us to use derivative financial
instruments for the purposes of hedging foreign currency denominated obligations. Our cash flows
are denominated in U.S. dollars.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: The Companys chief executive officer and chief
financial officer reviewed and evaluated the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
Based on that evaluation, the Companys principal executive officer and principal financial officer
concluded that the Companys disclosure controls and procedures were effective as of March 31, 2008
to ensure the information required to be disclosed by the Company in this Quarterly Report on Form
10-Q is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.
Changes in Internal Control over Financial Reporting: There were no changes in the Companys
internal control over financial reporting during the quarter ended March 31, 2008 that have
materially affected, or are reasonably likely to materially affect the Companys internal control
over financial reporting.
Inherent Limitations on Effectiveness of Controls: Internal control over financial reporting may
not prevent or detect all errors and all fraud. Also, projections of any evaluation of
effectiveness of internal control to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material legal proceedings.
Item 1A. Risk Factors
You should carefully consider the risks described below, together with all of the other information
included in this report, in considering our business and prospects. The risks and uncertainties
described below contain forward-looking statements, and our actual results may differ materially
from those discussed here. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. Each of these risk factors
could adversely affect our business, operating results and financial condition, as well as
adversely affect the value of an investment in our common stock.
We have marked with an asterisk (*) those risk factors below that reflect material changes from the
risk factors included in our 2007 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on February 28, 2008.
Nexavar®
(sorafenib) tablets is our only product, and we do not have any other product
candidates in Phase 2 or Phase 3 clinical development. If Nexavar is not commercially successful,
we may be unable to develop and commercialize alternative product candidates and our business would
fail.
Nexavar is our only product. We do not have internal research or preclinical development
capabilities. Our scientific and administrative employees are primarily dedicated to the
development and commercialization of Nexavar and managing our relationship with Bayer rather than
discovering or developing new product candidates. Thus, we do not have a clinical development
pipeline beyond Nexavar. If Nexavar is not commercially successful, we may be unable to develop and
commercialize alternative product candidates to later stage clinical development and
commercialization, which would cause our business to fail.
There are competing therapies approved for the treatment of advanced kidney cancer, and there are
several competing therapies in development for advanced kidney cancer and liver cancer. We expect
the number of approved therapies to increase, which could harm the prospects for Nexavar.
There are several competing therapies approved for the treatment of kidney cancer and, in addition,
several companies are developing novel multi-kinase inhibitors, antiangiogenic agents and other
targeted therapies for the treatment of kidney cancer. The market is highly competitive, and we
expect the competition to increase as additional products are approved to treat this type of
cancer, which could lead to a decrease in our market share.
For example, Sutent, a multi-kinase inhibitor marketed by Pfizer, was approved in 2006 in the
United States, the European Union and other countries for treating patients with advanced kidney
cancer and Gleevec-resistant gastrointestinal stromal tumors, or GIST. Results of a randomized
Phase 3 trial comparing Sutent to interferon, or IFN, in treatment-naïve patients with advanced
kidney cancer showed a median, progression free survival, or PFS, of 11 months for patients
receiving Sutent compared to 5 months for patients receiving IFN. Pfizer also has an earlier stage
compound, AG-013736, a multi-kinase inhibitor, which is in clinical development and is being
evaluated in kidney cancer patients.
Wyeth received an approval in May 2007 to market Torisel, an mTOR inhibitor, for the treatment of
patients with advanced kidney cancer. In June 2006, results of a randomized Phase 3 trial comparing
Torisel to IFN to both agents combined in treatment-naïve, poor-prognosis advanced kidney cancer
patients were reported. The primary endpoint of the study was overall survival. The reported median
overall survival was 10.9 months for Torisel alone as compared to 7.3 months for interferon. Wyeth
has also initiated a Phase 2/3 trial in second line RCC, which compares Torisel to Nexavar. The
results of this trial could impact our competitiveness in RCC.
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Genentechs Avastin was approved by the European Union for the treatment of patients with advanced
kidney cancer in combination with IFN. The approval was based on results reported from a Phase 3
randomized trial in treatment-naïve advanced kidney cancer patients comparing treatment with
Avastin and IFN to treatment with IFN alone. The reported PFS for patients who received the
combination was 10 months as compared to 5 months for those patients receiving IFN alone.
In addition, GlaxoSmithKline and Novartis also have agents in randomized Phase 3 clinical trials
for second-line advanced kidney cancer. Pazopanib, a multi-kinase inhibitor, and RAD-001, an mTOR
inhibitor, are both expected to have results from these Phase 3 trials in 2008. In February 2008,
Novartis announced that an independent review committee had stopped a late-stage trial of its
experimental kidney cancer drug everolimus, previously known as RAD001, because the study had met
its goal of progression-free survival in advanced kidney cancer patients.
In December 2006, we announced the results of the Phase 2 clinical trial comparing Nexavar to IFN,
which did not demonstrate PFS was favorable for patients who received Nexavar. Products that have
shown efficacy as compared to IFN or interleukin-2, or IL-2, or in treatment naïve-patients may be
preferred by the medical community.
Further, survival may become the most important element in determining standard of care. While we
did not demonstrate a statistically significant overall survival benefit for patients treated with
Nexavar in our Phase 3 kidney cancer trial, we believe the outcome was impacted by the cross over
of patients from placebo to Nexavar beginning in April 2005. Competitors with statistically
significant overall survival data could be preferred in the marketplace, which could impair our
ability to successfully market Nexavar.
The use of any particular therapy may limit the use of a competing therapy with a similar mechanism
of action. The FDA approval of Nexavar permits Nexavar to be used as an initial, or first-line,
therapy for the treatment of advanced kidney cancer, but some other approvals do not. For example,
the European Union approval indicates Nexavar only for advanced kidney cancer patients that have
failed prior therapy or whose physicians deem alternate therapies inappropriate.
The successful introduction of other new therapies to treat kidney cancer or liver cancer could
significantly reduce the potential market for Nexavar in these indications. There are also
competing therapies in development for liver cancer. Decreased demand for Nexavar would harm our
ability to realize revenue and profits from Nexavar, which could cause our stock price to fall.
Although Nexavar has been approved in the United States, European Union and other territories for
the treatment of patients with liver cancer, adoption may be slow or limited for a variety of
reasons including the geographic distribution of the patient population, the current treatment
paradigm for liver cancer patients and the underlying liver disease present in most liver cancer
patients. If Nexavar is not broadly adopted for the treatment of liver cancer, our business would
be harmed.
Nexavar has been approved in the United States, the European Union and many other countries as the
first systemic treatment for liver cancer. The rate of adoption and the ultimate market size will
be dependent on several factors including educating treating physicians on the appropriate use of
Nexavar and the management of patients who are receiving Nexavar. This may be difficult due to
patients typically having underlying liver disease and comorbidities in addition to their liver
cancer and often being treated by a variety of medical specialists. In addition, screening,
diagnostic and treatment practices can vary significantly by region. Further, liver cancer is
common in many regions in the developing world where the healthcare systems are limited and
reimbursement for Nexavar is not available, which will likely limit or slow adoption. If we are
unable to change the treatment paradigms for this disease, we may be unable to successfully
commercialize Nexavar for this indication, which could harm our business.
If our ongoing and planned clinical trials fail to demonstrate that Nexavar is safe and effective
or we are unable to obtain necessary regulatory approvals, we will be unable to expand the
commercial market for Nexavar and our business may fail.*
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In collaboration with Bayer, we are conducting multiple clinical trials of Nexavar. We are
currently conducting a number of clinical trials of Nexavar alone or in combination with other
anticancer agents in kidney, liver, non-small cell lung, breast, melanoma, and other cancers
including a number of Phase 3 clinical trials.
Phase 3 trials are designed to more rigorously test the efficacy of a product candidate and are
normally randomized and double-blinded. Phase 3 trials are typically monitored by independent data
monitoring committees, or DMC, which periodically review data as a trial progresses. A DMC may
recommend that a trial be stopped before completion for a number of reasons including safety
concerns, patient benefit or futility. Our clinical trials may fail to demonstrate that Nexavar is
safe and effective, and Nexavar may not gain additional regulatory approval, which would limit the
potential market for the product causing our business to fail.
While we and Bayer have received marketing approval for Nexavar in the United States, the European
Union and other geographies, to treat liver cancer, many regulatory authorities have not completed
their review of the submissions and any review may not result in marketing approval by these other
authorities in this indication. In addition, though Nexavar is approved for the treatment of
patients with liver cancer in the European Union and elsewhere, certain countries require pricing
to be established before reimbursement for this indication may be obtained. We may not receive
pricing approvals at favorable levels or at all, which could harm our ability to broadly market
Nexavar.
Nexavar has not been approved in cancer types other than kidney and liver cancer. Success in one or
even several cancer types does not indicate that Nexavar would be approved or have successful
clinical trials in other cancer types. For example, in February 2006 we and Bayer initiated a Phase
3 clinical trial in combination with carboplatin and paclitaxel in patients with non-small cell
lung cancer, or NSCLC, and this trial failed to show Nexavars efficacy in treating NSCLC. In
February 2008, this clinical trial was stopped early following a planned interim analysis when the
independent DMC concluded that the study would not meet its primary endpoint of improved overall
survival. Although other NSCLC trials are ongoing, Nexavar may never be approved for this
indication. In addition, higher mortality was observed in the subset of patients with squamous cell
carcinoma of the lung treated with Nexavar and carboplatin and paclitaxel versus those treated with
carboplatin and paclitaxel alone. Based on this observation, further enrollment of squamous cell
carcinoma of the lung has been suspended from ongoing NSCLC trials sponsored by us. Other cancer
types with a histology similar to squamous cell carcinoma of the lung may yield a similar adverse
treatment outcome. If so, patients having this histology may be excluded from ongoing and future
clinical trials, which would reduce the number of patients that could potentially receive Nexavar.
Further, many companies have failed to demonstrate the effectiveness of pharmaceutical product
candidates in Phase 3 clinical trials notwithstanding favorable results in Phase 1 or Phase 2
clinical trials. In addition, if previously unforeseen and unacceptable side effects are observed,
we may not proceed with further clinical trials of Nexavar. In our clinical trials, we may 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
unrelated to Nexavar. These adverse effects may impact the interpretation of clinical trial
results, which could lead to an erroneous conclusion regarding the toxicity or efficacy of Nexavar.
We are dependent upon our collaborative relationship with Bayer to manufacture and to further
develop and commercialize Nexavar. There may be circumstances that delay or prevent the development
and commercialization of Nexavar.
Our strategy for developing, manufacturing and commercializing Nexavar depends in large part upon
our relationship with Bayer. If we are unable to maintain our collaborative relationship with
Bayer, we would need to undertake development, manufacturing and marketing activities at our own
expense. This would significantly increase our capital and infrastructure requirements, may limit
the indications we are able to pursue and could prevent us from effectively developing and
commercializing Nexavar.
We are subject to a number of risks associated with our dependence on our collaborative
relationship with Bayer, including:
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adverse decisions by Bayer regarding the amount and timing of resource expenditures
for the development and commercialization of Nexavar; |
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possible disagreements as to development plans, including clinical trials or
regulatory approval strategy; |
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the right of Bayer to terminate its collaboration agreement with us on limited
notice and for reasons outside our control; |
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loss of significant rights if we fail to meet our obligations under the
collaboration agreement; |
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withdrawal of support by Bayer following the development or acquisition by it of
competing products; |
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changes in key management personnel at Bayer that are members of the collaborations
executive team; and |
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possible disagreements with Bayer regarding the collaboration agreement or ownership
of proprietary rights. |
Due to these factors and other possible disagreements with Bayer, we may be delayed or prevented
from further developing or commercializing Nexavar, or we may become involved in litigation or
arbitration, which would be time consuming and expensive.
Our collaboration agreement with Bayer terminates when patents expire that were issued in
connection with product candidates discovered under that agreement, or upon the time when neither
we nor Bayer are entitled to profit sharing under that agreement, whichever is later. Bayer holds
the global patent applications related to Nexavar. The patents and patent applications covering
Nexavar are owned by Bayer, but licensed to us through our collaboration agreement with Bayer.
Bayer has a United States patent that covers pharmaceutical compositions of Nexavar, which will
expire in 2022. Bayer also has a European patent that covers Nexavar, which will expire in 2020.
Bayer has other patent applications that are pending worldwide that cover Nexavar alone or in
combination with other drugs for treating cancer.
We face intense competition and rapid technological change, and many of our competitors have
substantially greater resources than we have.
We are engaged in a rapidly changing and highly competitive field. We are seeking to develop and
market Nexavar to 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 product candidates are in clinical
trials and others are approved. Competitors that target the same tumor types as our Nexavar program
and that have commercial products or product candidates at various stages of clinical development
include Pfizer, Genentech, Inc., Wyeth, Novartis International AG, Amgen, AstraZeneca PLC, OSI
Pharmaceuticals, Inc., GlaxoSmithKline, Imclone Systems and several others. A number of companies
have agents such as small molecules or antibodies targeting Vascular Endothelial Growth Factor, or
VEGF; VEGF receptors; Epidermal Growth Factor, or EGF; EGF receptors; and other enzymes. In
addition, many other pharmaceutical companies are developing novel cancer therapies that, if
successful, would also provide competition for Nexavar.
Many of our competitors, either alone or together with collaborators, have substantially greater
financial resources and research and development staffs. In addition, many of these competitors,
either alone or together with their collaborators, have significantly greater experience than we do
in:
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developing products; |
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undertaking preclinical testing and human clinical trials; |
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obtaining FDA and other regulatory approvals of products; and |
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manufacturing and marketing products. |
Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or
commercializing product candidates before we do. We will compete with 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 product
candidates to treat each of the diseases for which we are seeking to develop therapeutic products.
In addition, our product candidates, if approved, may 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.
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Developments by competitors may render our product candidates 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.
We have made significant expenditures toward the development of Nexavar and the establishment of a
commercialization infrastructure. If Nexavar cannot compete effectively in the marketplace, we may
be unable to realize sufficient revenue from Nexavar to offset our expenditures toward its
development and commercialization, and our business will suffer.
Our operating results are unpredictable and may fluctuate. If our operating results are below the
expectations of securities analysts or investors, the trading price of our stock could decline.
Our operating results will likely fluctuate from fiscal quarter to fiscal quarter and from year to
year, and are difficult to predict. Due to a highly competitive environment with existing and
emerging products in new markets, Nexavar sales will be difficult to predict from period to period.
Our operating expenses are largely independent of Nexavar sales in any particular period. We
believe that our quarterly and annual results of operations may be negatively affected by a variety
of factors. These factors include, but are not limited to, the level of patient demand for Nexavar,
the ability of Bayers distribution network to process and ship product on a timely basis,
fluctuations in foreign currency exchange rates, investments in sales and marketing efforts to
support the sales of Nexavar, Bayer and our investments in the research and development of Nexavar
and expenditures we may incur to acquire additional products.
In addition, as a result of our adoption of SFAS 123(R), we must measure compensation cost for
stock-based awards made to employees at the grant date of the award, based on the fair value of the
award, and recognize the cost as an expense over the employees requisite service period. As the
variables that we use as a basis for valuing these awards change over time, the magnitude of the
expense that we must recognize may vary significantly. Any such variance from one period to the
next could cause a significant fluctuation in our operating results.
It is, therefore, difficult for us to accurately forecast profits or losses. As a result, it is
possible that in some quarters our operating results could be below the expectations of securities
analysts or investors, which could cause the trading price of our common stock to decline, perhaps
substantially.
The market may not accept our products and pharmaceutical pricing and reimbursement pressures may
reduce profitability.
Nexavar or any future product candidates that we may develop may not gain market acceptance among
physicians, patients, healthcare payors and/or the medical community or the market may not be as
large as forecasted. One factor that may affect market acceptance of Nexavar or any future products
we may develop is the availability of third-party reimbursement. Our commercial success may depend,
in part, on the availability of adequate reimbursement for patients from third-party healthcare
payors, such as government and private health insurers and managed care organizations. Third-party
payors are increasingly challenging the pricing of medical products and services, especially in
global markets, and their reimbursement practices may affect the price levels for Nexavar. In
addition, the market for Nexavar may be limited by third-party payors who establish lists of
approved products and do not provide reimbursement for products not listed. If Nexavar is not on
the approved lists, our sales may suffer. Changes in government legislation or regulation, such as
the Medicare Act, including Medicare Part D, or changes in private third-party payors policies
towards reimbursement for our products may reduce reimbursement of our product costs and increase
the amounts that patients have to pay themselves. There are also non-government organizations that
can influence the use of Nexavar and reimbursement decisions for Nexavar. For example, the National
Comprehensive Cancer Network, or NCCN, a not-for-profit alliance of cancer centers has issued
guidelines for the use of Nexavar in the treatment of advanced kidney cancer and unresectable liver
cancer. These guidelines may affect treating physicians use of Nexavar in treatment-naïve advanced
kidney and liver cancer patients.
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Nexavars success in Europe will also depend largely on obtaining and maintaining government
reimbursement because, in many European countries, patients will not use prescription drugs that
are not reimbursed by their governments. Negotiating prices with governmental authorities can delay
commercialization by twelve months or more. Even if reimbursement is available, reimbursement
policies may adversely affect our ability to sell our products on a profitable basis. For example,
in Europe as in many international markets, governments control the prices of prescription
pharmaceuticals and expect prices of prescription pharmaceuticals to decline over the life of the
product or as volumes increase. Further reimbursement policies are subject to change due to
economic, political or competitive factors. We believe that this will continue into the foreseeable
future as governments struggle with escalating health care spending.
A number of additional factors may limit the market acceptance of products including the following:
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rate of adoption by healthcare practitioners; |
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treatment guidelines issued by government and non-government agencies; |
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rate of a products acceptance by the target population; |
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timing of market entry relative to competitive products; |
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availability of alternative therapies; |
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price of our product relative to alternative therapies; |
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extent of marketing efforts by us and third-party distributors or agents retained by
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side effects or unfavorable publicity concerning our products or similar products. |
If Nexavar or any future product candidates that we may develop do not achieve market acceptance,
we may not realize sufficient revenues from product sales, which may cause our stock price to
decline.
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
ongoing clinical trials, the actual timing of these events may be subject to significant delays
relating to various causes, including actions by Bayer, 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 complete clinical
trials involving Nexavar as projected or at all.
We and Bayer are launching a broad, multinational Phase 2 program in advanced breast cancer. The
program is being coordinated primarily by Onyx and designed and led by an international group of
experts in the field of breast cancer and includes multiple randomized Phase 2 trials. Onyx has not
conducted a clinical trial that has led to an NDA filing. Consequently, we may not have the
necessary capabilities to successfully manage the execution and completion of these planned
clinical trials in a way that leads to approval of Nexavar for the target indication. In addition,
we rely on Bayer, academic institutions, cooperative oncology organizations and clinical research
organizations to conduct, supervise or monitor most clinical trials involving Nexavar. We have less
control over the timing and other aspects of these clinical trials than if we conducted them
entirely on our own. Failure to commence or complete, or delays in our planned clinical trials
would prevent us from commercializing Nexavar in indications other than kidney cancer and liver
cancer, and thus seriously harm our business.
If serious adverse side effects are associated with Nexavar, approval for Nexavar could be revoked,
sales of Nexavar could decline, and we may be unable to develop Nexavar as a treatment for other
types of cancer.
The FDA-approved package insert for Nexavar for the treatment of patients with advanced kidney
cancer and unresectable liver cancer includes several warnings relating to observed adverse
reactions. These include, but are not limited to, cardiac ischemia and/or infarction; incidence of
bleeding; hypertension which may occur early in the therapy; hand-foot skin reaction and rash; and
some instances of gastrointestinal perforations. Other treatment-emergent adverse reactions
observed in patients taking Nexavar include, but are not limited to, diarrhea, fatigue, abdominal
pain, weight loss, anorexia, alopecia, nausea and vomiting. With continued and potentially expanded
commercial use of Nexavar and additional clinical trials of
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Nexavar, we and Bayer anticipate we will routinely update adverse reactions listed in the package
insert to reflect current information. For example, subsequent to the initial FDA approval, we and
Bayer updated the package insert to include additional information on new adverse reactions
reported by physicians using Nexavar. If additional adverse reactions emerge, or a pattern of
severe or persistent previously observed side effects is observed in the Nexavar patient
population, the FDA or other international regulatory agencies could modify or revoke approval of
Nexavar or we may choose to withdraw it from the market. If this were to occur, we may be unable to
obtain approval of Nexavar in additional indications and foreign regulatory agencies may decline to
approve Nexavar for use in any indication. Any of these outcomes would have a material adverse
impact on our business. In addition, if patients receiving Nexavar were to suffer harm as a result
of their use of Nexavar, these patients or their representatives may bring claims against us. These
claims, or the mere threat of these claims, could have a material adverse effect on our business
and results of operations.
We are subject to extensive government regulation, which can be costly, time consuming and subject
us to unanticipated delays.
Drug candidates under development and approved for marketing are subject to extensive and rigorous
domestic and foreign regulation. We have received regulatory approval for the use of Nexavar in the
treatment of advanced kidney and liver cancer in the United States, the European Union and a number
of foreign markets, and we are developing Nexavar for several additional indications.
We rely on Bayer to manage communications with regulatory agencies, including filing new drug
applications and generally directing the regulatory processes for Nexavar. We and Bayer may not
obtain necessary additional approvals from the FDA or other regulatory authorities. If we fail to
obtain required governmental approvals, we will experience delays in or be precluded from marketing
Nexavar in particular indications or countries. The FDA or other regulatory authorities may approve
only limited label information for the product. The label information describes the indications and
methods of use for which the product is authorized, and if overly restrictive, may limit our and
Bayers ability to successfully market any approved product. 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 product
candidates, we may experience delays in or be precluded from marketing products.
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 Nexavar. Delays in obtaining regulatory approvals would
adversely affect the successful commercialization of Nexavar.
After Nexavar and any other products we may develop are marketed, the products and their
manufacturers are subject to continual review. Later discovery of previously unknown problems with
Nexavar or manufacturing and production by Bayer or other third parties may result in restrictions
on Nexavar, including withdrawal of Nexavar from the market. In addition, problems or failures with
the products of others, before or after regulatory approval, including our competitors, could have
an adverse effect on our ability to obtain or maintain regulatory approval for Nexavar. If we fail
to comply with applicable regulatory requirements, we could be subject to penalties, including
fines, suspensions of regulatory approval, product recall, seizure of products and criminal
prosecution.
We are dependent on the efforts of Bayer to market and promote Nexavar.
Under our collaboration and co-promotion agreements with Bayer, we and Bayer are co-promoting
Nexavar in the United States. If we continue to co-promote Nexavar, and continue to co-fund
development in the United States, we will share equally in profits or losses, if any, in the United
States.
We do not, however, have the right to co-promote Nexavar in any country outside the United States,
and we are dependent solely on Bayer to promote Nexavar in foreign countries where Nexavar is
approved. In all foreign countries, except Japan, Bayer will first receive a portion of the product
revenues to repay Bayer for its foreign commercialization infrastructure, before determining our
share of profits and losses. In Japan, we will receive a royalty on any sales of Nexavar.
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We have limited ability to direct Bayer in its promotion of Nexavar in foreign countries where
Nexavar is approved. Bayer may not have sufficient experience to promote oncology products in
foreign countries and may fail to devote appropriate resources to this task. If Bayer fails to
adequately promote Nexavar in foreign countries, we may be unable to obtain any remedy against
Bayer. If this were to happen, sales of Nexavar in any foreign countries where Nexavar is approved
may be harmed, which would negatively impact our business.
Similarly, Bayer may establish a sales and marketing infrastructure for Nexavar outside the United
States that is too large and expensive in view of the magnitude of the Nexavar sales opportunity or
establish this infrastructure too early in view of the ultimate timing of potential regulatory
approvals. Since we share in the profits and losses arising from sales of Nexavar outside of the
United States, rather than receiving a royalty (except in Japan), we are at risk with respect to
the success or failure of Bayers commercial decisions related to Nexavar as well as the extent to
which Bayer succeeds in the execution of its strategy.
We are dependent on the efforts of and funding by Bayer for the development Nexavar.
Under the terms of the collaboration agreement, we and Bayer must agree on the development plan for
Nexavar. If we and Bayer cannot agree, clinical trial progress could be significantly delayed or
halted. Further, if we or Bayer cease funding development of Nexavar under the collaboration
agreement, then that party will be entitled to receive a royalty, but not to share in profits.
Bayer could, upon 60 days notice, elect at any time to terminate its co-funding of the development
of Nexavar. If Bayer terminates its co-funding of Nexavar development, we may be unable to fund the
development costs on our own and may be unable to find a new collaborator, which could cause our
business to fail.
We do not have manufacturing expertise or capabilities and are dependent on Bayer to fulfill our
manufacturing needs, which could result in lost sales and the delay of clinical trials or
regulatory approval.
Under our collaboration agreement with Bayer, Bayer has the manufacturing responsibility to supply
Nexavar for clinical trials and to support our commercial requirements. However, should Bayer give
up its right to co-develop Nexavar, we would have to manufacture Nexavar, or contract with another
third party to do so for us. We lack the resources, experience and capabilities to manufacture
Nexavar or any future product candidates on our own and would require substantial funds to
establish these capabilities. Consequently, we are, and expect to remain, dependent on third
parties to manufacture our product candidates and products. 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 impair our ability to meet the market demand for Nexavar, and
could delay our ongoing 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 products or to develop our own manufacturing capabilities.
If Bayers business strategy changes, it may adversely affect our collaborative relationship.
Bayer may change its business strategy. Decisions by Bayer to either reduce or eliminate its
participation in the oncology field, or to add competitive agents to its portfolio, could reduce
its financial incentive to promote Nexavar. A change in Bayers business strategy may adversely
affect activities under its collaboration agreement with us, which could cause significant delays
and funding shortfalls impacting the activities under the collaboration and seriously harming our
business.
We have a history of losses, and we may continue to incur losses.
Our net loss for the years ended December 31, 2007, 2006 and 2005 was $34.2 million, $92.7 million
and $95.2 million, respectively. As of March 31, 2008, we had an accumulated deficit of
approximately $457.2 million. We have incurred
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these losses principally from costs incurred in our research and development programs, from our
general and administrative costs and the development of our commercialization infrastructure. We
may continue to incur operating losses as we and Bayer expand our development and commercial
activities.
We have made significant expenditures towards the development and commercialization of Nexavar and
may never realize sufficient product sales to offset these expenditures. Our ability to achieve and
maintain consistent profitability depends upon success by us and Bayer in marketing the approved
product, completing development of Nexavar and obtaining the required regulatory approvals.
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 key employees may have an adverse impact on our business unless or
until we hire a suitably qualified replacement. We do not maintain key person life insurance on any
of our officers, employees or consultants. Any of our key personnel could terminate their
employment with us at any time and without notice. We depend on our continued ability to attract,
retain and motivate highly qualified personnel. We face competition for qualified individuals from
numerous pharmaceutical and biotechnology companies, universities and other research institutions.
If we resume our research and development of product candidates other than Nexavar, we will need to
hire individuals with the appropriate scientific skills. If we cannot hire these individuals in a
timely fashion, we will be unable to engage in new product candidate discovery activities.
We may need additional funds, and our future access to capital is uncertain.
We may need additional funds to conduct the costly and time-consuming clinical trials necessary to
develop Nexavar for additional indications, pursue regulatory approval, commercialize Nexavar in
Europe and the rest of the world and acquire rights to additional product candidates. Our future
capital requirements will depend upon a number of factors, including:
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revenue from our product sales; |
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global product development and commercialization activities; |
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the cost involved in enforcing patent claims against third parties and defending
claims by third parties; |
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the costs associated with acquisitions or licenses of additional products; |
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competing technological and market developments; and |
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repayment of our of milestone-based advances. |
We may not be able to raise additional capital on favorable terms, or at all. If we are unable to
obtain additional funds, we may not be able to fund our share of commercialization expenses and
clinical trials. We may also have to curtail operations or obtain funds through collaborative and
licensing arrangements that may require us to relinquish commercial rights or potential markets or
grant licenses on terms that are unfavorable to us.
We believe that our existing capital resources and interest thereon will be sufficient to fund our
current development plans beyond 2009. However, if we change our development plans, acquire rights
to or license additional products or if Nexavar is not accepted in the marketplace, we may need
additional funds sooner than we expect. In addition, we anticipate that our share of expenses under
our collaboration with Bayer may increase over the next several years as we continue our share of
funding for the Nexavar clinical development program and expansion of commercial activities for
Nexavar throughout the world. While these costs are unknown at the current time, we may need to
raise additional capital to continue the co-funding of the Nexavar program through and beyond 2009.
While Nexavar has received marketing approvals in several countries outside of the United States,
it has not been approved in all of these foreign countries and may receive limited marketing
approval or may be denied marketing approval in additional countries.
In December 2005, the FDA granted full approval for the treatment of patients with advanced kidney
cancer. In July 2006, the European Commission granted marketing authorization for Nexavar for the
treatment of patients with advanced kidney
26
cancer who have failed prior interferon-alpha or
interleukin-2 based therapy or are considered unsuitable for such therapy. To date, Nexavar has
received approvals in over 70 territories worldwide including the United States and all of the
major European countries for the treatment of advanced kidney cancer. In the fourth quarter of
2007, Nexavar was approved by the FDA and European Union for the treatment of patients with liver
cancer.
While Nexavar is currently approved in Europe for the treatment of liver cancer, reimbursement
discussions for this indication are ongoing in several European countries. Nexavar is also approved
for liver cancer in Canada, several Latin American countries and
currently only in a limited number of Asian
countries, including Korea. In addition, Bayer has filed for the liver cancer indication in a
number of regions, including Asia, notably, China and Taiwan. Additional foreign regulatory
authorities may not, however, be satisfied with the safety and efficacy data submitted in support
of these foreign applications for liver cancer, which could result in non-approval, a requirement
of additional clinical trials, further analysis of existing data or a restricted use of Nexavar.
Lack of marketing approval in a particular country would prevent us from selling Nexavar in that
country, which could harm our business. In addition, we and Bayer will be required to negotiate the
price of Nexavar with European governmental authorities in order for Nexavar to be eligible for
government reimbursement. In many European countries, patients will not use prescription drugs that
are not reimbursable by their governments. European price negotiations could delay
commercialization in a particular country by twelve months or more. In some countries, where liver
cancer is common, the healthcare systems are limited and reimbursement for Nexavar is not
available, which will limit or slow adoption.
If the specialty pharmacies and distributors that we and Bayer rely upon to sell our products fail
to perform, our business may be adversely affected.
Our success depends on the continued customer support efforts of our network of specialty
pharmacies and distributors. A specialty pharmacy is a pharmacy that specializes in the dispensing
of medications for complex or chronic conditions, which often require a high level of patient
education and ongoing management. The use of specialty pharmacies and distributors involves certain
risks, including, but not limited to, risks that these specialty pharmacies and distributors will:
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not provide us with accurate or timely information regarding their inventories, the
number of patients who are using Nexavar or complaints about Nexavar; |
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not effectively sell or support Nexavar; |
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reduce their efforts or discontinue to sell or support Nexavar; |
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not devote the resources necessary to sell Nexavar in the volumes and within the
time frames that we expect; |
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be unable to satisfy financial obligations to us or others; and |
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cease operations. |
Any such failure may result in decreased product sales and profits, which would harm our business.
We or Bayer may not be able to protect our intellectual property, which gives us the power to
exclude third parties from using Nexavar, or we may not be able to 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:
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obtain patents; |
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license technology rights from others; |
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protect trade secrets; |
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operate without infringing upon the proprietary rights of others; and |
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prevent others from infringing on our proprietary rights. |
In the case of Nexavar, the global patent applications related to this product candidate are held
by Bayer, but licensed to us in conjunction with our collaboration agreement with Bayer. Bayer has
a United States Patent that covers pharmaceutical compositions of Nexavar which will expire in
2022. Based on a review of the public patent databases, Bayer also has a
European Patent that covers Nexavar, which will expire in 2020. Bayer has other patent applications
that are pending worldwide that cover Nexavar alone or in combination with other drugs for treating
cancer. Certain of these patents may be
27
subject to
possible patent-term extensions, either in the
U.S. or abroad, the entitlement to and the term of which cannot presently be calculated, in part
because Bayer does not share with us information related to its Nexavar patent portfolio. As of
March 31, 2008, we owned or had licensed rights to 60 United States patents and 27 United States
patent applications and, generally, the foreign counterparts of these filings. Most of these
patents or patent applications cover protein targets used to identify product candidates during the
research phase of our collaborative agreements with Warner-Lambert Company, now Pfizer, or Bayer,
or aspects of our now discontinued virus program. Additionally, we have corresponding patents or
patent applications pending or granted in certain foreign jurisdictions.
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. 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 not have been the first to make the inventions covered by each of our issued or pending
patent applications, or we may not have been the first to file patent applications for these
inventions. Competitors may have independently developed technologies similar to ours. We may need
to license the right to use third-party patents and intellectual property to develop and market our
product candidates. We may not acquire required licenses on acceptable terms, if at all. If we do
not obtain these required licenses, we may need to design around other parties patents, or we may
not be able to proceed with the development, manufacture or, if approved, sale of our product
candidates. We may face litigation to defend against claims of infringement, 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, especially patent litigation, are costly.
Bayer may have rights to publish data and information in which we have rights. In addition, we
sometimes engage individuals, entities or consultants to conduct research that may be relevant to
our business. The ability of these individuals, entities or consultants to publish or otherwise
publicly disclose data and other information generated during the course of their research is
subject to certain contractual limitations. The nature of the limitations depends on various
factors, including the type of research being conducted, the ownership of the data and information
and the nature of the individual, entity or consultant. In most cases, these individuals, entities
or consultants are, at the least, precluded from publicly disclosing our confidential information
and are only allowed to disclose other data or information generated during the course of the
research after we have been afforded an opportunity to consider whether patent and/or other
proprietary protection should be sought. If we do not apply for patent protection prior to
publication or if we cannot otherwise maintain the confidentiality of our technology and other
confidential information, then our ability to receive patent protection or protect our proprietary
information will be harmed.
Limited foreign intellectual property protection and compulsory licensing could limit our revenue
opportunities.*
The laws of some foreign countries do not protect intellectual property rights to the same extent
as the laws of the United States. Some companies have encountered significant problems in
protecting and defending such rights in foreign jurisdictions. Many countries, including certain
countries in Europe and developing countries, have compulsory licensing laws under which a patent
owner may be compelled to grant licenses to third parties. In those countries, Bayer, the owner of
the Nexavar patent estate, may have limited remedies if the Nexavar patents are infringed or if
Bayer is compelled to grant a license of Nexavar to a third party, which could materially diminish
the value of those patents that cover Nexavar. If compulsory licenses were extended to include
Nexavar, this could limit our potential revenue opportunities. Moreover, the legal systems of
certain countries, particularly certain developing countries, do not favor the aggressive
enforcement of patent and other intellectual property protection, which may make it difficult to
stop infringement. Many countries limit the enforceability of patents against government agencies
or government contractors. These factors could also negatively affect our revenue opportunities in
those countries.
28
We may incur significant liability if it is determined that we are promoting the off-label use of
drugs or are otherwise found in violation of federal and state regulations in the United States or
elsewhere.
Physicians may prescribe drug products for uses that are not described in the products labeling
and that differ from those approved by the FDA or other applicable regulatory agencies. Off-label
uses are common across medical specialties. Physicians may prescribe Nexavar for the treatment of
cancers other than advanced kidney cancer or liver cancer, although neither we nor Bayer are
permitted to promote Nexavar for the treatment of any indication other than advanced kidney cancer
or liver cancer. The FDA and other regulatory agencies have not approved the use of Nexavar for
any other indications. Although the FDA and other regulatory agencies do not regulate a physicians
choice of treatments, the FDA and other regulatory agencies do restrict communications on the
subject of off-label use. Companies may not promote drugs for off-label uses. Accordingly, prior to
approval of Nexavar for use in any indications other than advanced kidney cancer or liver cancer,
we may not promote Nexavar for these indications. The FDA and other regulatory agencies actively
enforce regulations prohibiting promotion of off-label uses and the promotion of products for which
marketing clearance has not been obtained. A company that is found to have improperly promoted
off-label uses may be subject to significant liability, including civil and administrative remedies
as well as criminal sanctions.
Notwithstanding the regulatory restrictions on off-label promotion, the FDA and other regulatory
authorities allow companies to engage in truthful, non-misleading, and non-promotional speech
concerning their products. We engage in the support of medical education activities and communicate
with investigators and potential investigators regarding our clinical trials. Although we believe
that all of our communications regarding Nexavar are in compliance with the relevant regulatory
requirements, the FDA or another regulatory authority may disagree, and we may be subject to
significant liability, including civil and administrative remedies as well as criminal sanctions.
We face product liability risks and may not be able to obtain adequate insurance.
The sale of Nexavar and its ongoing use in clinical trials exposes us to liability claims. Although
we are not aware of any historical or anticipated product liability claims against us, if we cannot
successfully defend ourselves against product liability claims, we may incur substantial
liabilities or be required to limit commercialization of Nexavar.
We believe that we have obtained reasonably adequate product liability insurance coverage that
includes the commercial sale of Nexavar and our clinical trials. However, the cost of insurance
coverage is rising. We may not be able to maintain insurance coverage at a reasonable cost. We may
not be able to obtain additional insurance coverage that will be adequate to cover product
liability risks that may arise should a future product candidate receive marketing approval.
Regardless of merit or eventual outcome, product liability claims may result in:
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decreased demand for a product; |
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injury to our reputation; |
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withdrawal of clinical trial volunteers; and |
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loss of revenues. |
Thus, whether or not we are insured, a product liability claim or product recall may result in
significant losses.
If we do not receive timely and accurate financial and market information from Bayer regarding the
development and sale of Nexavar, we may be unable to accurately report our results of operations.
Due to our collaboration with Bayer, we are highly dependent on Bayer for timely and accurate
information regarding the costs incurred in developing and selling Nexavar, and any revenues
realized from its sale, in order to accurately report our results of operations. If we do not
receive timely and accurate information or incorrectly estimate activity levels associated with the
co-promotion and development of Nexavar at a given point in time, we could record significant
additional expense in future periods and may be required to restate our results for prior periods.
Such inaccuracies or restatements could cause a loss of investor confidence in our financial
reporting or lead to claims against us, resulting in a decrease in the trading price of shares of
our common stock.
29
Provisions in our collaboration agreement with Bayer may prevent or delay a change in control.
Our collaboration agreement with Bayer provides that if Onyx is acquired by another entity by
reason of merger, consolidation or sale of all or substantially all of our assets, and Bayer does
not consent to the transaction, then for 60 days following the transaction, Bayer may elect to
terminate Onyxs co-development and co-promotion rights under the collaboration agreement. If Bayer
were to exercise this right, Bayer would gain exclusive development and marketing rights to the
product candidates developed under the collaboration agreement, including Nexavar. If this happens,
Onyx, or the successor to Onyx, would receive a royalty based on any sales of Nexavar and other
collaboration products, rather than a share of any profits which could substantially reduce the
economic value derived from the sales of Nexavar to Onyx or its successor. These provisions of our
collaboration agreement with Bayer may have the effect of delaying or preventing a change in
control, or a sale of all or substantially all of our assets, or may reduce the number of companies
interested in acquiring Onyx.
Accounting pronouncements may affect our future financial position and results of operations.
There may be new accounting pronouncements or regulatory rulings, which may have an effect on our
future financial position and results of operations. For example, in December 2004, the Financial
Accounting Standards Board, or FASB, issued a revision of Statement of Financial Accounting
Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation. The revision is referred to
as SFAS 123(R) Share-Based Payment, which supersedes Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and requires companies to recognize
compensation expense, using a fair-value based method, for costs related to share-based payments
including stock options and stock issued under our employee stock plans. We adopted SFAS 123(R)
using the modified prospective basis on January 1, 2006. The adoption of SFAS 123(R) had a material
adverse impact on our results of operations and our net loss per share. For example, as a result of
our adoption of SFAS 123(R), for the quarter ended March 31, 2008 our net income decreased by
$5.2 million, or $0.09 per basic and diluted share, and for the quarter ended March 31, 2007 our
net loss increased by $3.0 million, or $0.06 per share. Similar to SFAS 123(R), the FASB could
issue other new accounting pronouncements that could affect our future financial position and
results of operations.
Our stock price is volatile.
Our stock price is volatile and is likely to continue to be volatile. In the period beginning
January 1, 2004 and ending March 31, 2008, our stock price ranged from a high of $59.50 and a low
of $10.44. A variety of factors may have a significant affect on our stock price, including:
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fluctuations in our results of operations; |
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interim or final results of, or speculation about, clinical trials of Nexavar, such
as the announcement that we and Bayer had stopped the Phase 3 clinical trial of Nexavar
in combination with carboplatin and paclitaxel in patients with NSCLC; |
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decision by regulatory agencies, or changes in regulatory requirements; |
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ability to accrue patients into clinical trials; |
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developments in our relationship with Bayer; |
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public concern as to the safety and efficacy of our product candidates; |
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changes in healthcare reimbursement policies; |
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announcements by us or our competitors of technological innovations or new
commercial therapeutic products; |
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government regulation; |
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developments in patent or other proprietary rights or litigation brought against us; |
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sales by us of our common stock or debt securities, including sales under our
committed equity financing facility arrangement with Azimuth; |
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foreign currency fluctuations, which would affect our share of collaboration profits
or losses; and |
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general market conditions. |
30
Existing stockholders have significant influence over us.
Our executive officers, directors and 5% stockholders
own, in the aggregate, approximately 20% 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, which it is not currently exercising, to have its
nominee elected to our board of directors as long as we continue to collaborate on the development
of a compound. Because of these rights, ownership and voting arrangements, our officers, directors,
principal stockholders and collaborator may be able to effectively control the election of all
members of the board of directors and determine all corporate actions.
A portion of our investment portfolio
is invested in auction rate securities, and if auctions
continue to fail for amounts we have invested, our investment will not be liquid. If the issuer of
an auction rate security that we hold is unable to successfully close future auctions and their
credit rating deteriorates, we may be required to adjust the carrying value of our investment
through an impairment charge to earnings.*
A portion of our investment portfolio
is invested in auction rate securities. The underlying assets
of these securities are student loans substantially backed by the federal government. Due to
adverse developments in the credit markets, beginning in February 2008 these securities have
experienced failures in the auction process. When an auction fails for amounts we have invested,
the investment becomes illiquid. In the event of an auction failure, we are not able to access
these funds until a future auction on these investments is
successful. We have reclassified these securities from short-term to
long-term investments, and if the issuer is unable to
successfully close future auctions and their credit rating deteriorates, we may be required to
adjust the carrying value of the investment through an impairment charge to earnings.
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. In December 2006, following our
announcement that a Phase 3 trial administering Nexavar or placebo tablets in combination with the
chemotherapeutic agents carboplatin and paclitaxel in patients with advanced melanoma did not meet
its primary endpoint, our stock price declined significantly. Similarly, following our announcement
in February 2008 that one of our Phase 3 trials for non-small cell lung cancer had been stopped
because and independent DMC analysis concluded that it did not meet its primary endpoint of
improved overall survival, our stock price declined significantly. We may in the future be the
target of securities class action litigation. Securities litigation could result in substantial
costs, could divert managements attention and resources, and could seriously harm our business,
financial condition and results of operations.
Our operating results could be adversely affected by product sales occurring outside the United
States and fluctuations in the value of the United States dollar against foreign currencies.
A significant percentage of Nexavar sales are generated outside of the United States. Nexavar sales
and operating expenses denominated in foreign currencies could affect our operating results as
foreign currency exchange rates fluctuate. Changes in exchange rates between these foreign
currencies and the U.S. Dollar will affect the recorded levels of our assets and liabilities as
foreign assets and liabilities are translated into U.S. Dollars for presentation in our financial
statements, as well as our net sales, cost of goods sold, and operating margins. The primary
foreign currency in which we have exchange rate fluctuation exposure is the European Union Euro. As
we expand, we could be exposed to exchange rate fluctuation in other currencies. Exchange rates
between these currencies and U.S. Dollars have fluctuated significantly in recent years and may
do so in the future. Hedging foreign currencies can be difficult, especially if the currency is not
freely traded. We cannot
31
predict the impact of future exchange rate fluctuations on our operating
results. We currently do not hedge any foreign currencies
Provisions in Delaware law, our charter and executive change of control agreements we have entered
into 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 corporations outstanding voting stock, for three years following the date
that the stockholder acquired 15% or more of the corporations stock unless:
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the board of directors approved the transaction where the stockholder acquired 15%
or more of the corporations stock; |
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after the transaction in which the stockholder acquired 15% or more of the
corporations stock, the stockholder owned at least 85% of the corporations
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 |
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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:
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our board is classified into three classes of directors as nearly equal in size as
possible with staggered three-year terms; |
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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; |
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all stockholder actions must be effected at a duly called meeting of stockholders
and not by written consent; |
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special meetings of the stockholders may be called only by the chairman of the
board, the chief executive officer, the board or 10% or more of the stockholders
entitled to vote at the meeting; and |
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no cumulative voting. |
These provisions may have the effect of delaying or preventing a change in control, even at
stock prices higher than the then current stock price.
We have entered into change in control severance agreements with each of our executive officers.
These agreements provide for the payment of severance benefits and the acceleration of stock option
vesting if the executive officers employment is terminated within 24 months of a change in control
of Onyx. The change in control severance agreements may have the effect of preventing a change in
control.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
32
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
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3.1 (1)
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Restated Certificate of Incorporation of the Company. |
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3.2 (2)
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Bylaws of the Company. |
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3.3 (3)
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Certificate of Amendment to Amended and Restated Certificate of Incorporation. |
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3.4 (4)
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Certificate of Amendment to Amended and Restated Certificate of Incorporation. |
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4.1
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Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4. |
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4.2 (1)
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Specimen Stock Certificate. |
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10.21 (5) +
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Bonuses for Fiscal Year 2007 and Base Salaries for Fiscal Year 2008 for Named
Executive Officers. |
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10.22 (6) +
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Employment Agreement between the Company and N. Anthony Coles, M.D., dated as
of February 22, 2008. |
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10.23 (6) +
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Executive Change in Control Severance Benefits Agreement between the Company
and N. Anthony Coles, M.D., dated as of February 22, 2008. |
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10.24 (6) +
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Retirement Agreement between the Company and Hollings C. Renton, dated as of
February 22, 2008. |
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31.1 (7)
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Certification of Chief Executive Officer as required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
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31.2 (7)
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Certification of Principal Financial Officer as required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
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32.1 (7)
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Certifications required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities
Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18
of the United States Code (18 U.S.C. 1350). |
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+ |
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Management contract or compensatory plan. |
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Filed as an exhibit to the Companys Registration Statement on Form SB-2 (No. 333-3176-LA). |
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Filed as an exhibit to Onyxs Current Report on Form 8-K filed on May 25, 2007. |
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Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000. |
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(4) |
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Filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-134565)
filed on May 30, 2006. |
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(5) |
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Filed as an exhibit to Onyxs Current Report on Form 8-K filed on February 8, 2008. |
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(6) |
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Filed as an exhibit to Onyxs Current Report on Form 8-K filed on February 26, 2008. |
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(7) |
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This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not
deemed filed with the Securities and Exchange Commission and is not to be incorporated by
reference into any filing of Onyx Pharmaceuticals, Inc. |
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under the Securities Act of 1933, as
amended or the Securities Exchange Act of 1934, as amended (whether made before or after the date
of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language
contained in such filing. |
SIGNATURES
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: May 6, 2008
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By:
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/s/ N. Anthony Coles |
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N. Anthony Coles |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: May 6, 2008
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By:
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/s/ Gregory W. Schafer |
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Gregory W. Schafer |
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Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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34
EXHIBIT INDEX
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3.1 (1)
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Restated Certificate of Incorporation of the Company. |
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3.2 (2)
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Bylaws of the Company. |
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3.3 (3)
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Certificate of Amendment to Amended and Restated Certificate of Incorporation. |
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3.4 (4)
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Certificate of Amendment to Amended and Restated Certificate of Incorporation. |
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4.1
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Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4. |
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4.2 (1)
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Specimen Stock Certificate. |
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10.21 (5) +
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Bonuses for Fiscal Year 2007 and Base Salaries for Fiscal Year 2008 for Named
Executive Officers. |
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10.22 (6) +
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Employment Agreement between the Company and N. Anthony Coles, M.D., dated as
of February 22, 2008. |
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10.23 (6) +
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Executive Change in Control Severance Benefits Agreement between the Company
and N. Anthony Coles, M.D., dated as of February 22, 2008. |
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10.24 (6) +
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Retirement Agreement between the Company and Hollings C. Renton, dated as of
February 22, 2008. |
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31.1 (7)
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Certification of Chief Executive Officer as required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
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31.2 (7)
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Certification of Principal Financial Officer as required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
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32.1 (7)
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Certifications required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities
Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18
of the United States Code (18 U.S.C. 1350). |
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+ |
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Management contract or compensatory plan. |
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(1) |
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Filed as an exhibit to the Companys Registration Statement on Form SB-2 (No. 333-3176-LA). |
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(2) |
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Filed as an exhibit to Onyxs Current Report on Form 8-K filed on May 25, 2007. |
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(3) |
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Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000. |
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(4) |
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Filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-134565)
filed on May 30, 2006. |
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(5) |
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Filed as an exhibit to Onyxs Current Report on Form 8-K filed on February 8, 2008. |
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(6) |
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Filed as an exhibit to Onyxs Current Report on Form 8-K filed on February 26, 2008. |
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(7) |
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This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not
deemed filed with the Securities and Exchange Commission and is not to be incorporated by
reference into any filing of Onyx Pharmaceuticals, Inc. under the Securities Act of 1933, as
amended or the Securities Exchange Act of 1934, as amended (whether made before or after the date
of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language
contained in such filing. |
35